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Delayed compensation for lost income

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Abstract

Lengthy legal proceedings are often required before an individual who has unjustly lost income is compensated. The utility loss while waiting in straitened circumstances exceeds the utility gain from later compensation if compensation is merely monies lost plus interest. The excess loss will be larger the more averse the individual is to intertemporal variation in consumption, the less complete and perfect the markets for borrowing and trading contingent claims, and the less the certainty about whether an award will be made. To make an injured individual whole, the focus should be on compensating not for loss of discounted income, but for loss of utility.

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Authors and Affiliations

  1. Graduate School of Business Administration, Harvard University, 02163, Boston, MA

    John W. Pratt

  2. John F. Kennedy School of Government, Harvard University, 79 Kennedy St., 02138, Cambridge, MA

    Richard Zeckhauser

Authors
  1. John W. Pratt
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  2. Richard Zeckhauser
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Additional information

David Kuo, Laurie King, and Linda Herman provided valuable research assistance. The Decision, Risk, and Management Science program at the National Science Foundation and the Bradley Foundation provided research support.

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Pratt, J.W., Zeckhauser, R. Delayed compensation for lost income. J Risk Uncertainty 7, 301–310 (1993). https://doi.org/10.1007/BF01079629

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  • DOI: https://doi.org/10.1007/BF01079629

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