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Compensation in Personal Injury Cases: Mean or Median Income?

Author

Listed:
  • Leif Danziger
  • Eliakim Katz

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.

Suggested Citation

  • Leif Danziger & Eliakim Katz, 2019. "Compensation in Personal Injury Cases: Mean or Median Income?," CESifo Working Paper Series 7748, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_7748
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    File URL: https://www.cesifo-group.de/DocDL/cesifo1_wp7748.pdf
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    References listed on IDEAS

    as
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    4. Göran Skogh & Luisa Tibiletti, 1999. "Compensation of Uncertain Lost Earnings," European Journal of Law and Economics, Springer, vol. 8(1), pages 51-61, July.
    5. Markus K. Brunnermeier & Stefan Nagel, 2008. "Do Wealth Fluctuations Generate Time-Varying Risk Aversion? Micro-evidence on Individuals," American Economic Review, American Economic Association, vol. 98(3), pages 713-736, June.
    6. Osborne, Evan, 1999. "Courts as Casinos? An Empirical Investigation of Randomness and Efficiency in Civil Litigation," The Journal of Legal Studies, University of Chicago Press, vol. 28(1), pages 187-203, January.
    7. Gang Liu, 2011. "Measuring the Stock of Human Capital for Comparative Analysis: An Application of the Lifetime Income Approach to Selected Countries," OECD Statistics Working Papers 2011/6, OECD Publishing.
    8. Pierre‐André Chiappori & Monica Paiella, 2011. "Relative Risk Aversion Is Constant: Evidence From Panel Data," Journal of the European Economic Association, European Economic Association, vol. 9(6), pages 1021-1052, December.
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    More about this item

    Keywords

    compensation; personal injury; income loss; uncertainty; risk aversion;

    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics

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