The Unexpected Effects of Caps on Non-Economic Damages

15 Pages Posted: 12 May 2008 Last revised: 19 Nov 2010

Ronen Avraham

Tel Aviv University - Tel Aviv University, Buchmann Faculty of Law; University of Texas at Austin - School of Law

Álvaro E. Bustos

Pontificia Universidad Catolica de Chile

Date Written: March 31, 2010

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.

Keywords: tort reform, caps on damages, length of dispute resolution

JEL Classification: K13, K20, K41

Suggested Citation

Avraham, Ronen and Bustos, Álvaro E., The Unexpected Effects of Caps on Non-Economic Damages (March 31, 2010). Northwestern Law & Econ Research Paper No. 08-09; U of Texas Law, Law and Econ Research Paper No. 139. Available at SSRN: https://ssrn.com/abstract=1125182 or http://dx.doi.org/10.2139/ssrn.1125182

Ronen Avraham (Contact Author)

Tel Aviv University - Tel Aviv University, Buchmann Faculty of Law ( email )

Tel Aviv
Israel

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States
(512) 232-1357 (Phone)

HOME PAGE: http://www.utexas.edu/law/faculty/profile.php?id=ra22397

Álvaro E. Bustos

Pontificia Universidad Catolica de Chile ( email )

Vicuna Mackena 4860. Macul
Santiago
Chile

HOME PAGE: http://https://sites.google.com/site/20bustos13/

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