Unintended consequences of discrimination litigation caps

Abstract

On July 14, 1992, the U.S. Equal Employment Opportunity Commission (EEOC) implemented a policy that caps discrimination litigation payouts at $50,000, $100,000, $200,000, and $300,000 for firms with 15 to 100 employees, 101 to 200 employees, 201 to 500 employees, and 501 employees or more, respectively. This institutional change allows for a difference-in-discontinuities design by combining the before/after with the discontinuous policy variation. I find that firm growth decreases for firms subject to floating discrimination litigation caps (firms with less than 501 employees) after the implementation of the policy. These firms reduce financing and are not motivated to decrease growth by relative changes in cash flows from discrimination risk exposure. I explain these findings by showing that floating caps, as compared to fixed caps, incentivize firms to restrict their number of employees, which reduces their discrimination litigation exposure by $13.5 million, or 30% of revenues.

Keywords: EEOC, Employee discrimination, Litigation caps

JEL Classification: G30, G40, J71