Incentives for Care, Litigation, and Tort Reform under Self-Serving Bias
Forthcoming in Thomas Miceli and Mathew Baker (eds.), The Research Handbook on Economic Models of Law, Forthcoming
43 Pages Posted: 22 Oct 2012
Date Written: October 21, 2012
Abstract
This chapter presents a strategic model of incentives for care and litigation under asymmetric information and self-serving bias, and studies the effects of damage caps. Our main findings are as follows. First, our results suggest that the defendant's bias decreases his expenditures on accident prevention, and hence, increases the likelihood of accidents. Second, both litigants' biases increase the likelihood of disputes. Third, our results indicate that, although self-serving bias help litigants commit on tough negotiation positions, it is economically self-defeating for the informed plaintiff. Fourth, our findings suggest that that the plaintiff's bias is always welfare reducing. The defendant's bias is welfare reducing if under-deterrence is present. We then illustrate the benefits of incorporating self-serving bias into the theoretical analysis of tort reform by studying the effects of damage caps. We find that this tort reform decreases the defendant's level of care if the biased defendant perceives the cap as relatively low. Importantly, we find that the positive effect of damage caps on lowering the likelihood of disputes, commonly attributed to this tort reform, might not necessarily be observed in environments with biased litigants: Caps might induce higher likelihood of disputes if the defendant perceives the cap as relatively low, and the plaintiff perceives the cap as relatively high. As a result, this tort reform might be welfare reducing.
Keywords: Settlement, Litigation, Incentives for Care, Self-Serving Bias, Tort Reform, Damage Caps, Asymmetric Information, Apparent Opponents, Perfect Bayesian Equilibrium, Motivated Reasoning, Divergent Beliefs, Universal Divinity Refinement, Motivated Anchoring, Non-Cooperative Games, Disputes
JEL Classification: K13, K41, C72, D82, Z18, J58, J52
Suggested Citation: Suggested Citation