An Empirical Evaluation of Two Methods for Estimating Economic Damages: Authors' Reply

Abstract

In our article (Lambrinos and Harmon, 1990), we conclude that both the offset approach and the augmented approach - the offset approach augmented by an age earning profile - underestimate lifetime earnings relative to the present value of the actual earnings, and that the magnitude of the error is greater for the offset approach than for the augmented approach. Using actual earnings for 1971 to 1983 reported in the Panel Study of Income Dynamics (PSID) and the discount rate of 4.1 percent, we report that the augmented approach provides a more accurate estimate of the present value of actual earnings than does the offset approach. In his review of our article Harris (1991) states the following conclusion: Thus, whether estimated present values are judged to be overestimated or underestimated in comparison with actual present values can depend upon the interest rate selected to discount actual earnings. Furthermore, since the mean actual present value is a function of the interest rate selected to discount actual earnings, the magnitude of the errors found by Lambrinos and Harmon when evaluating the accuracy of the two estimating approaches can be effected as well.