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The unexpected effects of caps on non-economic damages

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  • Avraham, Ronen
  • Bustos, Álvaro

Abstract

This paper focuses on the economic and legal implications of the enactment of caps on non-economic damages on conflicting parties who know that state supreme courts may strike down the caps as unconstitutional within a few years of enactment. We develop a simple screening model where parties have symmetric expectations regarding the probability of a strike down and asymmetric information regarding plaintiff's non-economic harm. Our model makes the following predictions: First, caps may increase the length required to resolve disputes if the caps are low enough or the probability of a strike down is large enough. Second, although caps always increase the percentage of disputes that are settled out of courts, they do not necessarily save litigation expenses. Third, when caps increase the length of dispute resolution, they also increase litigation expenses if and only if the settlement negotiation costs are neither too small nor too large. Fourth, while caps always reduce the recoveries of plaintiffs with large claims, caps may increase recoveries of plaintiffs with low claims compared to their recoveries in states with no caps. We end by discussing the robustness of the results.

Suggested Citation

  • Avraham, Ronen & Bustos, Álvaro, 2010. "The unexpected effects of caps on non-economic damages," International Review of Law and Economics, Elsevier, vol. 30(4), pages 291-305, December.
  • Handle: RePEc:eee:irlaec:v:30:y:2010:i:4:p:291-305
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    Cited by:

    1. Landeo, Claudia & Nikitin, Maxim & Izmalkov, Sergei, 2012. "Playing against an Apparent Opponent: Incentives for Care, Litigation, and Damage Caps under Self-Serving Bias," Working Papers 2012-9, University of Alberta, Department of Economics.
    2. Paola Bertoli & Veronica Grembi, 2018. "Courts, scheduled damages, and medical malpractice insurance," Empirical Economics, Springer, vol. 55(2), pages 831-854, September.
    3. Claudia M. Landeo, 2018. "Law and economics and tort litigation institutions: theory and experiments," Chapters, in: Joshua C. Teitelbaum & Kathryn Zeiler (ed.), Research Handbook on Behavioral Law and Economics, chapter 9, pages 247-268, Edward Elgar Publishing.
    4. Helland, Eric & Seabury, Seth A., 2015. "Tort reform and physician labor supply: A review of the evidence," International Review of Law and Economics, Elsevier, vol. 42(C), pages 192-202.
    5. Zhou, J., 2010. "Access to justice : An economic approach," Other publications TiSEM 9d70f451-35c4-4878-92bf-7, Tilburg University, School of Economics and Management.

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    More about this item

    Keywords

    Tort reform Caps on recoveries Length of dispute resolution;

    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • K20 - Law and Economics - - Regulation and Business Law - - - General
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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