Compensation in Personal Injury Cases: Mean or Median Income?

20 Pages Posted: 29 Jul 2019

See all articles by Leif Danziger

Leif Danziger

Ben-Gurion University of the Negev - Department of Economics; IZA Institute of Labor Economics

Eliakim Katz

E. Katz Economics Inc.

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Date Written: July 2019

Abstract

Courts typically base compensation for loss of income in personal injury cases on either mean or median work income. Yet, quantatively, mean and median incomes are typically very different. For example, in the US median income is 65 percent of mean income. In this paper we use economic theory to determine the relation between the appropriate make-whole (full) compensation and mean and median work incomes. Given that consumption uncertainty associated with compensation generally exceeds that associated with work income, we show that the appropriate make-whole compensation exceeds mean (and therefore median) work income. Hence, if the compensation must be either the mean or the median work income, then mean work income should be selected.

Keywords: compensation, personal injury, income loss, uncertainty, risk aversion

JEL Classification: K13

Suggested Citation

Danziger, Leif and Katz, Eliakim, Compensation in Personal Injury Cases: Mean or Median Income? (July 2019). IZA Discussion Paper No. 12466, Available at SSRN: https://ssrn.com/abstract=3427604

Leif Danziger (Contact Author)

Ben-Gurion University of the Negev - Department of Economics ( email )

Beer-Sheva 84105
Israel
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HOME PAGE: http://www.econ.bgu.ac.il/facultym/danziger/main.htm

IZA Institute of Labor Economics

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Germany

Eliakim Katz

E. Katz Economics Inc.

Canada

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