Economic Damage Claims: Concept and Estimation Issues

1
Economic Damage ClaimsConcept and Estimation
Issues

• By
• Mostafa Moini, Ph.D.
• Professor of Economics
• Meinders School of Business
• http//ocu-stars.olcu.edu/mmoini
• mmoini_at_okcu.edu
• Oklahoma City University
• Thursday, October 21, 2004
• Open to the Public

2
Introduction

• After discussing some recent developments I shall
  turn to
• Conceptual Issues
• A Landmark Supreme Court Case
• Ethical Issues
• Estimation and Measurement Problems

3
Recent Developments

• In recent decades litigation has been rising
  rapidly in the U.S.
• Increases have occurred with respect to the
• number
• variety
• average size
• and scope of claims

4
Recent Developments

• This has been true of both
• economic and
• hedonic
• damage claims

5
Concepts

• Economic damage claim relates to a plaintiffs
  loss of
• Wealth and / or
• Future income

6
Concepts

• Hedonic damage is concerned with a Plaintiffs
  pain and suffering

7
Demand for Economists

• Increase in litigation has led to a rising
  demand for economists serving as expert witness.

8
Methodological Developments

• This has in turn interested some members of the
  profession in the development of such conceptual
  and methodological tools

9
Methodological Developments

• that would help the courts in their objectives of
  
• identifying the categories of economic damage in
  each case and
• estimating the magnitudes involved.

10
Published Literature

• Many Journals publish the research work that is
  accumulating in this area.

11
Published Literature

• Examples
• Journal of Risk and Insurance
• Journal of Forensic Econimcs
• Journal of Legal Finance

12
Concepts

• Methodological progress in forensic economics
  seems to be leading to
• some degree of convergence in estimates of
  economic damage calculated by different
  economists.

13
Concepts

• The same cannot be said, however, about hedonic
  damage claims

14
A Landmark Case

• In the landmark case of Daubert v. Merrel (1993)
  the U.S. Supreme Court established specific
  criteria for admission of expert testimony.

15
A Basic Distinction

• In an article (1996) surveying the situation
  following the said court decision, Ireland,
  Johnson, and Taylor conclude that

16
A Basic Distinction

• Over and over, the judges who are rejecting
  hedonic damage are doing so in stated contrast
  to their acceptance of

17
A Basic Distinction

• lost earnings and lost household services
  methodologies employed by forensic economists

18
Majority Practice

• Majority of economists rightly remain skeptical
  about the methods proposed by a few for
  quantifying the damages due to pain and
  suffering.

19
Majoruty Practice

• Such methods attempt to establish precision in an
  area which inherently defies precision.

20
Concepts

• Please observe that it is not
• the concept and principle of hedonic damage that
  is inquestion,

21
Concepts

• but rather the dubious methodologies
• that have been proposed and used by a few for

22
Concepts

• measuring this type of damage.

23
Scope

• The scope of my presentation does not permit me
  to elaborate further on this matter.

24
My Position

• As an indication of my own position in this area
  I quote the following from a recent case in which
  I testified as expert witness

25
Concepts

• With its emphasis on subjectivity and
  individuality of value, modern theory of value
  rejects all attempts toward objective
  determination of hedonic damages as theoretically
  unfounded.

26
My Position

• As to the question of exactly how a fair
  compensation for hedonic damages should be
  determined,

27
Concepts

• only juries can and should decide. Economics
  cannot contribute anything in this regard.

28
Ethical Issues

• Notwithstanding the emerging convergence of
  concepts and methods used for measuring economic
  damage,

29
Ethical Issues

• Considerable leeway remains on plausible grounds.

30
Ethical Issues

• Which could cause the damage estimates
  calculated by different economists to deviate
  from one another significantly.

31
Ethical Issues

• This means that ethical issues may arise as an
  economist tilts in one direction to render the
  estimates more or less favorable to a plaintiff.

32
Ethical Issues

• The issue is of great concern among the
  practicing economists in this field.
• It is discussed rather widely in the literature

33
Ethical Issues

• In an article (1999) titled The Law and
  Economics of the Expert Witness

34
Ethical Issues

• the noted chief judge and University of Chicago
  legal scholar
• Richard A. Posner gets to the heart of the matter

35
Ethical Issues

• Expert witnesses paid by the respective
  parties are bound to be partisans (hired guns)
  rather than being disinterested, and hence
  presumptively truthful, or at least honest,
  witnesses

36
Ethical Issues

• The law that governs the use of expert witness is
  set forth in Article VII of the Federal Rules of
  Evidence.

37
Ethical Issues

• In contrast to an ordinary witness an expert
  witness is permitted to offer an opinion,
  applying expert knowledge to the facts of a case.

38
Ethical Issues

• But this leads to a classic principal-agent case
  with the parties having asymmetric information.

39
Ethical Issues

• The agent, the economist, knows more than the
  court, the principal.

40
Ethical Issues

• Writes Posner Expert witnesses, it is feared,
  can mislead judges and juries more readily than
  lay witnesses can because they are more
  difficulty to pick apart on cross-examination
  they can hide behind an impenetrable wall of
  esoteric knowledge.

41
Ethical Issues

• An area of economic theory known as agency
  costs has concerned itself with the
  investigation of the economic issues that arise
  in all principal-agent situations.

42
Ethical Issues

• But the ethical issues of the problem are yet to
  be adequately explored.

43
Ethical Issues

• In the meantime the practicing economists in the
  field have tried to face the problem quite
  directly

44
Ethical Issues

• The have worked toward adoption of a code of
  professional ethics in order to help alleviate
  the difficulties they face.

45
Estimation Concepts and Methods

• Turning to measurement and estimation issues
• I shall discuss some aspects of an economic
  damage report that I produced recently in
  connection with a wrongful termination case.

46
Estimation Concepts and Methods

• This involved workplace racial discrimination
  against a high-level government employee over a
  period of several years, eventuating in
  termination.

47
Estimation Concepts and Methods

• The case has a variety of features that make it
  interesting for expository purposes.
• I shall point these out as I proceed with the
  discussion.

48
Estimation Concepts and Methods
49
Estimation Concepts and Methods

• Technology has made life a lot easier
• It is possible proceed in a much more
  user-friendly manner

50
Estimation Concepts and Methods

• Excel will make it possible to proceed in an
  intuitive manner.
• But a few words first

51
Estimation Concepts and Methods
To Estimate the economic damage suffered by a
plaintiffs it is necessary to construct
plausible scenarios of
52
Estimation Concepts and Methods
what the economic situation of the plaintiff
would have been in the absence of the damage.
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Estimation Concepts and Methods
The case we are about to examine involved losses
of income prior to termination due to denied or
partially denied promotion and salary increases.
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Estimation Concepts and Methods
This affected not only his salary level at the
time of termination but as well the employers
contribution to his retirement fund.
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Estimation Concepts and Methods
But I shall focus on the basics only, limiting
myself to the issues related to
56
Estimation Concepts and Methods
calculation of foregone income both prior to, and
following the plaintiffs termination.
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Estimation Concepts and Methods
In order to project his income over the course of
the years following the wrongful termination, one
cannot use his actual income at the time of
termination
58
Estimation Concepts and Methods
For this income would have been different much
higher , had the plaintiff received the
promotion and salary increases in the years
preceding the termination.
59
Estimation Concepts and Methods
Such allowances have been calculated in a
different spreadsheet and the result is carried
as the base-year income for the plaintiff at the
time of termination.
See Excel File, Table V The Excel files and
discussion related thereto, used during the live
lecture, are not accessible for the presentation
posted on my website. The viewer may proceed
directly to the next slide.
60
Advantages of Spreadsheet Models
Compared to the algebraic model Excel provides
an intuitive way for presenting the data and the
relations involved in the model
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Advantages of Spreadsheet Models
Compared to the algebraic model Many assumptions
can be easily incorporated into the Excel version
to fit the model more closely closer to a
specific case.
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Advantages of Spreadsheet Models
The algebraic model, while indispensable as a
core element in the spreadsheet model, it lacks
the possibilities offered by the latter to fit
the model t a specific case.
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Advantages of Spreadsheet Models
Excel makes it possible to run many scenarios to
show the amount by which the final damage
estimate changes due to changes
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Advantages of Spreadsheet Models

• in the specific assumptions regarding
• the structure or
• the parameters
• of the model.

65
Advantages of Spreadsheet Models
This is of particular interest when the case may
be used in a mediation process, where the
mediator and the two legal teams engage in
negotiating with respect to the details of a case.
66
Concluson
The courts are increasingly relying on economists
as expert witness in determining damage claims in
in a great variety of cases.
67
Concluson
The 1993 Daubert v. Merrell case seems to have
helped increase the demand for economists as
expert witness.
68
Concluson
The case has sharply distinguished between the
concepts and estimation methods applied in
estimating economic damage and those used in
relation to hedonic damage.
69
Concluson
The courts have consistently upheld the former
and rejected the latter.
70
Concluson
And economists have taken initiatives to
discourage such practices that are not
definitively supported by economic theory or by
the concepts and practices that prevail within
the judicial system
71
Concluson
Information technology has made it possible to
construct sophisticated, flexible, and intuitive
models for calculating economic damage claims.
72
Thank you for your attention Mostafa Moini, Ph.D.