Compensation of Uncertain Lost Earnings

10800

12 Pages Posted: 27 Sep 1997

See all articles by Goran Skogh

Goran Skogh

affiliation not provided to SSRN

Luisa Tibiletti

University of Turin - Department of Management

Abstract

The present value of expected lost earnings is normally regarded as the amount that fully compensates the victim of an accident. Courts tend, however, to pay less compensation for uncertain losses. We show that such "under-compensation" may be efficient if the victim is risk averse. In the framework of the von-Neumann-Morgenstern utility theory, a rule for determining an immediate certainty equivalent for lost potential earnings is suggested. The equivalent depends not only on the degree of risk aversion but also on the interrelation between the future losses. The importance of the correlation is normally neglected, although it is quite intuitive that a risk averse victim judges a stream of negatively correlated random amounts to be less risky than the analogous stream of positively correlated losses.

JEL Classification: J28, K31

Suggested Citation

Skogh, Goran and Tibiletti, Luisa, Compensation of Uncertain Lost Earnings. 10800. Available at SSRN: https://ssrn.com/abstract=28973 or http://dx.doi.org/10.2139/ssrn.28973

Goran Skogh (Contact Author)

affiliation not provided to SSRN

Luisa Tibiletti

University of Turin - Department of Management ( email )

C.so Unione Sovietica, 218 bis
Turin, Turin 10100
Italy
39-11-670-6229 (Phone)
39-11-670-6238 (Fax)

HOME PAGE: http://www.management.unito.it/tibiletti

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