To estimate the present value of future lost earnings, forensic economists must employ some method to determine the interest rate and the earnings growth rate, or the net discount rate derived from them, to use in that estimation. Historical simulation can be used to determine how accurate any such method would have been had it been used in the past. In this paper, historical simulation is used to compare the accuracy of nine different methods of choosing the net discount rate to estimate present value for numerous 30-, 20- and 10-year loss periods. These methods include historical averages, current rates, recent rates, total offset, and a number of methods that combine historical averages with current or recent rates. While no one method is obviously superior in all cases, the results do provide some support for blending historical averages with current or recent rates.Abstract
The present work considers the problem of valuing a future income stream in a perfect foresight economy. In this setting, with competitive equilibrium in labor and asset markets, market valuation of labor-generated income streams can be very simple. However, it can also be undone by moral hazard, in which case valuation may be based instead on fair compensation. I show that perfect foresight valuation emerges somewhat imperfectly in the forensic economics literature. To apply this type of valuation, the economist must form an expectation E[P] about perfect foresight price P. I consider several models of this expectation, some of which yield standard present value equations. I find that, while standard equations “fit” historical data well in some respects, they miss some dynamics that are better captured by more advanced econometric methods.Abstract
This paper surveys the development of income-based human capital methods in public health economics which, with the exception of worklife expectancy, forms the methodological core of forensic economics. The main differences in the application of human capital valuation between the two disciplines are the use of statistical population averages and gross costs in public health economics and individual-specific estimates and net costs in forensic economics. The paper provides examples of the public health economics application of the human capital approach in cost-of-illness (COI) analyses of disease or injury, disability, and premature mortality with specific discussion of cerebral palsy.Abstract
The degree of risk that should be incorporated into the net discount rate that is used to estimate the present value of future lost earnings has been the subject of controversy. While some forensic economists insist that a risk-free discount rate must be used, others have offered economic arguments that support use of a risk-adjusted rate. Historical simulation studies have found that, when the discount rate is based on risk-free or low-risk securities, the historical averages method of estimating present value is subject to large forecast errors due to significant changes in net discount rates over time. This study explores whether basing the discount rate on mixed portfolios of equities, intermediate-term government bonds, and Treasury bills might result in more accurate estimation. Using the historical averages method with data covering the period 1926–2008, results are generated for four mixed portfolios of varying degrees of risk, and these results are compared to the results obtained with Treasury bills, intermediate-term government bonds and long-term corporate bonds. The historical simulations do show that the mixed portfolios often provide more accurate estimates. These results should be of considerable interest to forensic economists who believe that some degree of risk should be incorporated into the discount rate.Abstract
Contributors to the Journal of Forensic Economics are compiling a state-by-state series of papers on how economic damages are assessed in personal injury and wrongful death cases. This paper discusses the rules of the court, the court system, and case law for the state of New York. New York's system is unique in several important ways. The state has passed statutes that specify in some detail both the method to be used to calculate damages and how a jury's verdict is to be transformed into a judgment. New York Civil Practice Law & Rules (CPLR) Articles 50-A and 50-B provide for separate and different treatment of medical malpractice cases and for all other standard torts, respectively. As a result, the damages sections of the two statutes provide specific guidance to the economic expert. Further, except in medical malpractice death cases, New York is different from other states in that its court does not require testifying economic damages experts to discount to present value. This paper discusses these issues and others to familiarize economic damages experts with the relevant court rules and rulings, as well as accepted practice, when performing economic damage appraisals in the state of New York.Abstract