Playing against an Apparent Opponent: Incentives for Care, Litigation, and Damage Caps under Self-Serving Bias

Claudia Landeo, Maxim Nikitin () and Sergei Izmalkov ()

No 2012-9, Working Papers from University of Alberta, Department of Economics

Abstract: This paper presents a strategic model of incentives for care and litigation under asymmetric information and self-serving bias, and studies the effects of damage caps. We contribute to the behavioral economics literature by generalizing the perfect Bayesian equilibrium concept to environments with biased litigants. Our main findings are as follows. First, our results suggest that self-serving bias might be welfare-reducing. The negative impact of this cognitive bias on social welfare is explained by the reduction in the level of care, and the increase in the likelihood of disputes. We also find that self-serving bias helps litigants commit to tough negotiation positions. However, it is economically self-defeating for the informed plaintiff. Second, our findings indicate that caps on non-economic damages might reduce the level of care. Importantly, we find that the positive effect of damage caps on lowering the likelihood of disputes, commonly attributed to caps, does not necessarily hold in environments with biased litigants: Caps might induce higher likelihood of disputes. Our findings are aligned with empirical and experimental evidence.

Keywords: settlement; litigation; incentives for care; caps on non-economic damages; self-serving bias; asymmetric information; apparent opponents; perfect Bayesian equilibrium; motivated reasoning; divergent beliefs; universal divinity refinement; motivated anchoring; non-cooperative games; disputes; pretrial bargaining (search for similar items in EconPapers)
JEL-codes: C72 D82 J52 J58 K13 K41 Z18 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2012-04-12
New Economics Papers: this item is included in nep-exp and nep-gth
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Playing against an Apparent Opponent: Incentives for Care, Litigation, and Damage Caps under Self-Serving Bias (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:albaec:2012_009

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