November, 2007

Using Neuroeconomics Experiments to Study Tort Reform

  • Kevin McCabe

    Mercatus Center Scholar
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Highlights 

Summary

This paper provides an overview of the tort process and introduces a scientific approach for evaluating tort reform proposals. In this paper, we describe an experiment that models the tort process and attempts to identify factors that promote pre-trial settlements. Results of the experiment indicate that promoting pre-trial settlements would benefit both plaintiffs and defendants, because money spent on costly litigation could be used to compensate tort victims and that speedy resolutions would give injured parties quicker access to the funds they need.

Our Findings

  • Increasing the amount of information about the case available to both parties in a lawsuit increases the likelihood of settlement.
  • Increasing the cost of taking a case to trial increases the likelihood of settlement.
  • Attorneys who do not bear the cost of going to court are less likely to settle than those who do. However, when non-cost-bearing attorneys do settle, they secure larger amounts due to aggressive bargaining. On balance, however, plaintiffs are worse off when attorneys do not bear the costs of going to court. The variability of contingent-fee contracts may undermine the intended effects of other tort reforms.
  • Cost-shifting provisions, such as the English Rule and California Rule 998, do not have a significant effect on settlement rates.

Experimental results also found that litigant subjects often went to court when they would have been better off accepting settlement offers. In 46% of the cases that went to court in our experiments, both parties had received settlement offers that would have made them better off than the expected court outcome. This suggests that, as litigants made concessions, they became more emotionally committed to their current positions and less willing to concede. Reforms that promote settlements and help overcome such emotional barriers could greatly benefit defendants, plaintiffs, and the tort system.

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