The Unexpected Effect of Tort Reform: Do Caps Delay Settlements?
44 Pages Posted: 2 Jul 2007
Date Written: June 2007
Conventional economic analysis of tort reform suggests that caps on non-economic damages reduce the time to settlement and consequently save litigation expenses. What the conventional analysis ignores is the real life fact that many of the caps are struck down by state supreme courts within a few years of enactment. We develop a simple screening and asymmetric information model which accounts for parties' symmetrical expectations for a striking down of the reform. The model predicts that that in states in which the expectation of a strike down is small (we call them states with solid caps) the time to settlement decreases, whereas in states in which that expectation is high (we call them states with non-solid caps) the time to settlement increases. Further, the model predicts that caps on non-economic damages not only tend to increase the fraction of cases that settle (which reduces litigation expenses) but also tend to increase the time required to resolve the conflict (which increases litigation expenses). We show that in states with solid caps the first effect dominates and litigation expenses would decrease, whereas in states with non-solid caps the second effect may dominate, in which case litigation expenses would increase. In addition, the model predicts that while plaintiff's with high claims always receive lower recoveries in states with caps, plaintiffs with low claims may receive lower or higher recoveries.
Using almost 200,000 medical malpractice settlement payments between 1991 and 2005 we show that many of our model's predictions are confirmed in practice. Importantly, we show that cases which were subject to solid caps were resolved faster (between .59 to 1.74 years faster). In contrast, cases subject to non solid caps were resolved 1/3 of a year more slowly compared to states with no caps Thus, caps seem to hit plaintiffs either by reducing the recoveries of plaintiffs with large claims, if caps are not struck-down, or by causing plaintiffs to get their damages at a later date, if caps are struck down.
Keywords: Torts, Medical Malpractice, Tort Reform, Damages, Empirical Work, Settlements, Negotiation, Asymmetrical Information
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