Avraham & Bustos on Damage Caps & Settlement

Ronen Avraham and Alvaro E. Bustos (Northwestern University - School of Law and Northwestern University - School of Law) have posted The Unexpected Effect of Tort Reform: Do Caps Accelerate Settlements? on SSRN.  Here is the abstract:

We study the economic and legal implications of the enactment of caps on noneconomic damages on parties in conflict who know that state supreme courts may strike down the caps as unconstitutional within a few years of enactment. We develop a simple screening model where parties have symmetric expectations regarding the probability of a strike down and asymmetric information regarding plaintiff's non-economic harm. Our model predicts that caps may increase the length of resolution of disputes if the caps are low enough or the probability of a strike down is large enough. Using an original database of more than 185,000 medical malpractice cases paid between 1991 and 2007, we provide empirical evidence that supports this result. Specifically, we show that cases subject to low caps demonstrate an increase in time to settlement, compared to cases that are not subject to caps, when the probability of a strike down is large. Furthermore, the theoretical model predicts: caps increase the percentage of disputes that are settled; caps do not necessarily save litigation expenses; while plaintiffs with large claims always receive lower recoveries in states with caps, recoveries for plaintiffs with low claims may increase or decrease compared to states with no caps.