Playing against an Apparent Opponent: Incentives for Care, Litigation, and Damage Caps under Self-Serving Bias
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.
|Date of creation:||12 Apr 2012|
|Date of revision:|
|Contact details of provider:|| Postal: 8-14 HM Tory, Edmonton, Alberta, T6G 2H4|
Phone: (780) 492-3406
Fax: (780) 492-3300
Web page: http://www.economics.ualberta.ca/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Landeo, Claudia M., 2009. "Cognitive coherence and tort reform," Journal of Economic Psychology, Elsevier, vol. 30(6), pages 898-912, December.
- 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.
- Maxim Nikitin & Claudia M. Landeo, 2004. "Split-Award Tort Reform, Firm's Level of Care and Litigation Outcomes," Econometric Society 2004 Latin American Meetings 4, Econometric Society.
- 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.
- Janet Currie & W. Bentley MacLeod, 2006.
"First Do No Harm?: Tort Reform and Birth Outcomes,"
NBER Working Papers
12478, National Bureau of Economic Research, Inc.
- Muhamet Yildiz, 2003. "Bargaining without a Common Prior-An Immediate Agreement Theorem," Econometrica, Econometric Society, vol. 71(3), pages 793-811, 05.
- Álvaro Bustos & Ronen Avraham., 2008.
"The Unexpected Effects of Caps on Non-Economic Damages,"
Documentos de Trabajo
353, Instituto de Economia. Pontificia Universidad Católica de Chile..
- 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.
- Brooks, Richard & Landeo, Claudia & Spier, Kathryn, 2009.
"Trigger Happy or Gun Shy? Dissolving Common-Value Partnerships with Texas Shootouts,"
2009-1, University of Alberta, Department of Economics, revised 01 Jul 2013.
- 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.
- Kennan, J. & Wilson, R., 1991.
"Bargaining with Private Information,"
90-01rev, University of Iowa, Department of Economics.
- Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
- Bruno Deffains & Eric Langlais, 2009.
"Legal Interpretative Process and Litigants’Cognitive Biases,"
EconomiX Working Papers
2009-8, University of Paris West - Nanterre la Défense, EconomiX.
- Deffains, Bruno & Langlais, Eric, 2008. "Legal Interpretative Process and Litigants’ Cognitive Biases," MPRA Paper 14370, University Library of Munich, Germany.
- Yasutora Watanabe, 2005. "Learning and Bargaining in Dispute Resolution: Theory and Evidence from Medical Malpractice Litigation," 2005 Meeting Papers 440, Society for Economic Dynamics.
- 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.
When requesting a correction, please mention this item's handle: RePEc:ris:albaec:2012_009. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Brenda Carrier)
If references are entirely missing, you can add them using this form.