Cat Caps restore 3.3 Sanity/min while worn and are tier 1 warm clothing items, increasing the time a character can be without a fire during the Winter before Freezing. They have an insulation factor of 60.
Since Catcoons can easily go extinct on a map, and only drop their Cat Tails by chance, it is best to keep this Hat maintained with a Sewing Kit.
Since Catcoon is a portmanteau of "cat " and "raccoon", this item is most likely based on the real life Coonskin Cap, made most famous by the frontiersman Davy Crockett. Wickerbottom's quote references this by saying "Not quite like Crockett's, but it'll do."