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Damage Caps and Settlement: A Behavioral Approach

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  • Babcock, Linda
  • Pogarsky, Greg

Abstract

Since 1970, at least 30 states have enacted legislation capping the damages plaintiffs can recover in a lawsuit. Guided by previous research on suit and settlement, we outline a simple framework for examining the effects of a cap on litigant judgments and the pretrial settlement rate. We then introduce several refinements to the simple framework that are based on findings from behavioral economics and psychology. In particular, we recognize litigants may possess "role-specific biases" in information processing and may be subject to nonpecuniary influences during pre-trial bargaining. Finally, the paper presents experimental evidence for the effects of a damage cap on litigants' judgments and the settlement rate. The results show that behavioral and psychological theories can greatly expand the explanatory power of models that depict the pretrial bargaining environment. Copyright 1999 by the University of Chicago.

Suggested Citation

  • Babcock, Linda & Pogarsky, Greg, 1999. "Damage Caps and Settlement: A Behavioral Approach," The Journal of Legal Studies, University of Chicago Press, vol. 28(2), pages 341-370, June.
    • Handle: RePEc:ucp:jlstud:v:28:y:1999:i:2:p:341-70
    DOI: 10.1086/468054
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    Cited by:

    1. Eric Cardella & Carl Kitchens, 2017. "The impact of award uncertainty on settlement negotiations," Experimental Economics, Springer;Economic Science Association, vol. 20(2), pages 333-367, June.
    2. Landeo, Claudia M., 2009. "Cognitive coherence and tort reform," Journal of Economic Psychology, Elsevier, vol. 30(6), pages 898-912, December.
    3. Florian Baumann & Tim Friehe, 2012. "Emotions in litigation contests," Economics of Governance, Springer, vol. 13(3), pages 195-215, September.
    4. Ronen Avraham, 2007. "An Empirical Study of the Impact of Tort Reforms on Medical Malpractice Settlement Payments," The Journal of Legal Studies, University of Chicago Press, vol. 36(S2), pages 183-229, June.
    5. 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.
    6. Yannick Gabuthy & Nicolas Jacquemet, 2013. "Analyse économique du droit et méthode expérimentale," PSE-Ecole d'économie de Paris (Postprint) halshs-00746617, HAL.
    7. Landeo, Claudia M., 2009. "Tort Reform, Disputes and Belief Formation," MPRA Paper 13453, University Library of Munich, Germany.
    8. 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 2012-15, University of Alberta, Department of Economics, revised 01 Oct 2012.
    9. Matteo Migheli & Margherita Saraceno, 2023. "On the propensity to settle or litigate in laboratory disputes," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 40(2), pages 615-642, July.
    10. Yasutora Watanabe, 2005. "Learning and Bargaining in Dispute Resolution: Theory and Evidence from Medical Malpractice Litigation," 2005 Meeting Papers 440, Society for Economic Dynamics.
    11. repec:hal:wpaper:halshs-00746617 is not listed on IDEAS
    12. 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.
    13. Dove John A. & Dove Laura R., 2020. "US State Tort Liability Reform and Entrepreneurship," Review of Law & Economics, De Gruyter, vol. 16(3), pages 1-45, November.

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