Damage caps and settlement: A behavioral approach

Since 1970, at least 30 states have enacted legislation capping the damages plaintiffs can recover in a lawsuit. Guided by previous research on suit and settlement, we outline a simple framework for examining the effects of a cap on litigant judgments and the pretrial settlement rate. We then introduce several refinements to the simple framework that are based on findings from behavioral economics and psychology. In particular, we recognize litigants may possess "role-specific biases" in information processing and may be subject to nonpecuniary influences during pretrial bargaining. Finally, the paper presents experimental evidence for the effects of a damage cap on litigants' judgments and the settlement rate. The results show that behavioral and psychological theories can greatly expand the explanatory power of models that depict the pretrial bargaining environment.