Journal of Risk and Insurance

Dec 1989 v56 n4 p733(7)

Title: An Empirical Evaluation of Two Methods For Estimating Economic Damages

Authors: James Lambrinos; Oskar R. Harmon.

ABSTRACT
A variety of approaches have been proposed and are used by economists to estimate economic damages in personal injury/wrongful death tort cases. These approaches vary from the straightforward offset or Alaska method, which enables one to calculate economic damages by multiplying the current earnings level by the number of years of worklife expectancy, to more complex approaches involving the use of real wage growth and discount rates and an age-earning's profile adjustment.

Although each approach has some theoretical foundation, no one has attempted to empirically evaluate which method does the best job in forecasting earnings losses for a large sample of workers. This article will attempt to fill this void in the economic damages literature by examining a longitudinal sample of workers whose earnings are available from 1968 through 1983. A longitudinal sample is ideal for this type of study since it can be assumed that, as of a certain age, workers either die or become permanently disabled. From the earnings of the individual prior to the hypothesized year of death or diablement, future wages may be projected and the present value obtained. The predicted present values may be compared with the actual present values using the individual's wages after this arbitrary year.

Two methods will first be presented that will be used to estimate economic losses. Next the data set to be employed along with the empirical methodology will be discussed. The following section will present the empirical results followed by conclusions.