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: Y 1, Y 2, …, Y n Y = income, or profit, or health care cost Y 1 = loss next year Y 2 = 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 ( G 1 + G 1 G 2 + … + G 1 G 2 … G n ) P is fair value – a lump sum award B is base “income” G is net growth rate

…Fair Value

…Net Growth Rates G 1 is net growth rate for next year, G 2 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+ G 2 + … + G n ) G is an estimate of future G 1, G 2,… Styles: base year, base period, historical period

…Actual Damages

A Look at Present Value

…Actual Damages Present Value vs. Fair Value

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

Fair Value Model