A major issue in the current debate over litigation reform concerns whether to limit the amount a plaintiff can recover in a lawsuit. Approximately thirty states now employ some type of `damage cap` that limits payments for pain and suffering, punitive damages, and other non-economic damages. However, very little research has examined their effect on the litigation process. This research uses experimental and field analysis and draws on the disciplines of economics, psychology, and law to explore the effects that damage caps have on the filing and settlement of lawsuits. In the first stage of the research, we conduct three pre-trial bargaining experiments to explore the behavioral mechanisms by which damage caps affect the prospects for settlement. Preliminary evidence suggests that when the damage cap is relatively low, it increases the likelihood of settlement. However, a very high damage cap can actually reduce the prospects for settlement by providing plaintiffs with an upward `focal point`. This implies that in a particular state, a cap statue will improve settlement rates for big cases and worsen them for small cases. Further experimentation will explore the sensitivity of these findings with respect to the level of the cap and allow a description of the behavioral processes underlying settlement. In the second stage of the research we collect extensive field data on the damage caps that are operable in the U.S. and estimate their impact on the number of claims filed and settled out-of- court. This empirical work significantly expands on previous work that has been conducted. First, the data collected covers a substantially longer time period than has been previously studied and it identifies the types of caps that are most effective. Second, our analysis improves on previous research by comparing the pre- and post-cap filing and settlement of cases covered by the cap (the `treatment` group) to those not covered by the cap (the `control` group). The combination of experimental and field methodologies provide a more complete understanding of the impact of damage caps on the litigation process. The experimental analysis helps to understand the behavioral changes induced by a cap, examine their ensuing effect on settlement, and explore the sensitivity of the results to the level of the cap. The field data analysis complements the experimental analysis by estimating the magnitude of the effect of caps and identifying the types of caps that are particularly influential. Both analyses will inform the debate about the effect of damage caps and suggest how cap statutes can be designed to comport with policy goals.
