A Primer on Prejudgment Interest

Abstract:     
If justice were immediate, there would never be an award of prejudgment interest. The injured party would immediately receive an enforceable judgment, with no loss from delay because of the time value of money. Because justice often takes many years to achieve, the laws of most U.S. jurisdictions provide that interest is added to the original judgment from the time of the injury to the date of judgment. Such interest, called prejudgment interest, plays an important role in expediting the resolution of disputes. In spite of the importance that prejudgment interest plays in the administration of justice, existing law provides trial court judges with nearly unfettered discretion in calculating prejudgment interest. That discretion has produced widely divergent results, seriously undercutting the law's goals of compensating the injured and deterring injurers. The paper describes how courts should go about calculating prejudgment interest. It suggests that prejudgment interest should be compounded and calculated at a floating rate that reflects the defendant's cost of unsecured borrowing.

JEL Classification: K41

working papers series