Economic Damages

Economic Damages Scott Gilbert Economics Department Southern Illinois University Carbondale

Outline 1. Economic loss and the uncertain future. 2. Fair value: financing an income stream. 3. Fair value and actual damage awards. 4. Fair value model, improved evaluation.

Economic Loss • Personal injury • Wrongful death • Wrongful termination → Lost future opportunities - income, profit, health Future = Uncertain

…Economic Loss Measuring Loss $, $, $ Future losses: Y1 , Y2 , … , Yn Y = income, or profit, or health care cost Y1 = loss next year Y2= loss 2 years from now, etc. n = number of future periods

…Economic Loss Compensation Lump sum award now: $ Compensates for loss: $, $, $

Fair Value Concept: Finance an “income” stream via government bonds. Research: Gilbert (2010) Brush (2004) Dulaney (1987)

…Fair Value Formula P = B ( G1+ G1 G2+ … + G1 G2 … Gn) P is fair value – a lump sum award B is base “income” G is net growth rate

…Fair Value Net Growth Rates W = income growth rate R = interest rate on 1-year bond

…Fair Value …Net Growth Rates G1 is net growth rate for next year, G2 is net growth rate 2 years from now, …etc.

…Fair Value Interpretation: Fair value is the lump sum award that restores the lost income stream. Problem: Fair value is unobserved, because future income growth & interest rates are unobserved. Solution: Model and predict fair value.

Actual Damage Awards “Present Value” PV = B (1 + G+ G2+ … + Gn ) G is an estimate of future G1, G2,… Styles: base year, base period, historical period

…Actual Damages

…Actual Damages A Look at Present Value

…Actual Damages • Present Value vs. Fair Value

Fair Value Model Econometric Model formula: P = -11.9 + 21.7 G source: historical fit of P to G - Gilbert (2010)

Fair Value Model

Economic Damages