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Litigation Services Handbook: The Role of the Financial Expert, 5th Edition by David P. Hoffman, Daniel G. Lentz, Roman L. Weil

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Chapter 5

Ex Ante versus Ex Post Damages Calculations*

Michael K. DunbarElizabeth A. EvansRoman L. Weil

5.1 Introduction

Economic damages awards in litigation serve a double purpose: they compensate entities that suffered harm from unlawful acts, and they deter future unlawful acts. The optimal compensation award should put an injured entity in the same economic position it would have been but for the act. The optimal deterrent award, putting aside punitive issues, should be equal to the ill-gotten gain derived from the unlawful act adjusted for the probability that someone will detect the act. In many cases these two amounts are the same. Consider an example whereby I steal $100 from you. If I were immediately apprehended and forced to return your money, then your economic loss would be eliminated and my ill-gotten $100 would have been disgorged. Under that circumstance, the compensation amount equals the deterrent amount. I would have no incentive to steal from you, and you would have no incentive to make it easy to be robbed.

In this example of immediate restitution, one can easily find an optimal award that satisfies both the compensation and deterrent purposes. Ideally, plaintiffs would receive instantaneous compensation for the damages they suffered without delay between the date of injury and the award of damages. If a delay occurs between the time of the unlawful act and the date of restitution, however, the victim's harm and the wrongdoer's ill-gotten gain often diverge. ...

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