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 presented 462 student subjects with materials outlining a personal injury lawsuit and permitted randomly assigned subject pairs to negotiate a pretrial settlement. We find that imposition of a $1 million cap reduced the settlement rate through 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. These results contrast with findings from previous experiments where a relatively low cap constrains the parties' judgments and produces more settlement. This pair of results suggests the effect of a cap will depend on its size relative to the stakes of the case.