The Effect of Capital Market Imperfections and Intertemporal Choice on Appraising Retirement Contributions

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Journal of Legal Economics





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The conventional approach to determining the pecuniary damages in personal injury litigation is to discount future wages to present value using a discount rate based on current or historic interest rates on Treasury securities. In addition to overcompensating the plaintiff by providing a set of choices that could not otherwise be obtained in a world characterized by imperfect and incomplete capital markets, the degree of overcompensation is even greater when valuing employer contributions to a retirement program. This is the result of: (a) the restrictive nature of qualified retirement plans that greatly reduce their liquity; (b) the retirement fund may be invested in risky assets; and (c) the portfolio of assets may not meet the Markowitz efficiency standard. Two major themes are developed. First an analysis is made of the welfare gains to an individual who is awarded a large sum to replace future employee retirement contributions as a result of being able to access the capital market and to choose an efficient portfolio. Second, an analysis is made of the gains from being able to reallocate consumption intertemporally.

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