Damage Caps, Motivated Anchoring, and Bargaining Impasse

Abstract

This paper reports results from a bargaining experiment testing the effect on settlement rates of a damage cap set much higher than the value of the underlying claim. We furnished 462 student subjects with materials outlining a personal injury lawsuit in which the only unresolved claim was the amount of damages the plaintiff should receive for physical pain and suffering and mental anguish. Subjects were assigned the role of either plaintiff or defendant and paired randomly with an adversary. For half the pairs, damages were capped at $1 million, while for the rest damages were uncapped. Whereas in a prior experiment, a $250,000 cap increased the settlement rate, the instant $1 million cap reduced the settlement rate. We find evidence in the current study for a process termed "motivated anchoring", in which a relatively high damage cap disproportionately anchors the plaintiff's estimate of the likely damage award. The result is a widened disparity in opposing litigants' judgments, and less settlement.