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Playing against an Apparent Opponent: Incentives for Care, Litigation, and Damage Caps under Self-Serving Bias

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Listed:
  • Landeo, Claudia

    () (University of Alberta, Department of Economics)

  • Nikitin, Maxim

    () (International College of Economics and Finance)

  • Izmalkov, Sergei

    () (New Economics School)

Abstract

This paper presents a strategic model of incentives for care and litigation under asymmetric information and self-serving bias, and studies the effects of damage caps. We contribute to the behavioral economics literature by generalizing the perfect Bayesian equilibrium concept to environments with biased litigants. Our main findings are as follows. First, our results suggest that self-serving bias might be welfare-reducing. The negative impact of this cognitive bias on social welfare is explained by the reduction in the level of care, and the increase in the likelihood of disputes. We also find that self-serving bias helps litigants commit to tough negotiation positions. However, it is economically self-defeating for the informed plaintiff. Second, our findings indicate that caps on non-economic damages might reduce the level of care. Importantly, we find that the positive effect of damage caps on lowering the likelihood of disputes, commonly attributed to caps, does not necessarily hold in environments with biased litigants: Caps might induce higher likelihood of disputes. Our findings are aligned with empirical and experimental evidence.

Suggested Citation

  • 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.
  • Handle: RePEc:ris:albaec:2012_009
    as

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    References listed on IDEAS

    as
    1. Yasutora Watanabe, 2005. "Learning and Bargaining in Dispute Resolution: Theory and Evidence from Medical Malpractice Litigation," 2005 Meeting Papers 440, Society for Economic Dynamics.
    2. Muhamet Yildiz, 2003. "Bargaining without a Common Prior-An Immediate Agreement Theorem," Econometrica, Econometric Society, vol. 71(3), pages 793-811, May.
    3. Christine Jolls & Cass R. Sunstein, 2006. "Debiasing through Law," The Journal of Legal Studies, University of Chicago Press, vol. 35(1), pages 199-242, January.
    4. Landeo, Claudia M., 2009. "Cognitive coherence and tort reform," Journal of Economic Psychology, Elsevier, vol. 30(6), pages 898-912, December.
    5. Claudia M. Landeo & Maxim Nikitin, 2006. "Split-Award Tort Reform, Firm's Level of Care, and Litigation Outcomes," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(4), pages 571-600, December.
    6. Richard R. W. Brooks & Claudia M. Landeo & Kathryn E. Spier, 2010. "Trigger happy or gun shy? Dissolving common-value partnerships with Texas shootouts," RAND Journal of Economics, RAND Corporation, vol. 41(4), pages 649-673.
    7. Landeo, Claudia M. & Nikitin, Maxim & Babcock, Linda, 2007. "Split-awards and disputes: An experimental study of a strategic model of litigation," Journal of Economic Behavior & Organization, Elsevier, vol. 63(3), pages 553-572, July.
    8. 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.
    9. Farmer, Amy & Pecorino, Paul, 2002. "Pretrial bargaining with self-serving bias and asymmetric information," Journal of Economic Behavior & Organization, Elsevier, vol. 48(2), pages 163-176, June.
    10. Deffains, Bruno & Langlais, Eric, 2008. "Legal Interpretative Process and Litigants’ Cognitive Biases," MPRA Paper 14370, University Library of Munich, Germany.
    11. Janet Currie & W. Bentley MacLeod, 2008. "First Do No Harm? Tort Reform and Birth Outcomes," The Quarterly Journal of Economics, Oxford University Press, vol. 123(2), pages 795-830.
    12. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, January.
    13. Kennan, John & Wilson, Robert, 1993. "Bargaining with Private Information," Journal of Economic Literature, American Economic Association, vol. 31(1), pages 45-104, March.
    14. Claudia M. Landeo & Maxim Nikitin & Scott Baker, 2007. "Deterrence, Lawsuits, and Litigation Outcomes Under Court Errors," Journal of Law, Economics, and Organization, Oxford University Press, vol. 23(1), pages 57-97, April.
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    More about this item

    Keywords

    settlement; litigation; incentives for care; caps on non-economic damages; self-serving bias; asymmetric information; apparent opponents; perfect Bayesian equilibrium; motivated reasoning; divergent beliefs; universal divinity refinement; motivated anchoring; non-cooperative games; disputes; pretrial bargaining;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation
    • J58 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Public Policy
    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
    • Z18 - Other Special Topics - - Cultural Economics - - - Public Policy

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