Self-Consumption in Wrongful Death Cases: Decedent or Family Income?

Abstract

In most states, it is necessary to deduct self-consumption of the deceased when estimating lost earning capacity from wrongful death. The impact whether this deduction is taken only from deceased earnings or from total family income can be substantial. As an example, assume that the now deceased wife earned $30,000 while the surviving husband earned $100,000. For simplicity, assume that self-consumption is 30% of earnings regardless of the level of earnings. Self-consumption based upon the decedent's income is $9,000 and the loss would be $21,000. However, self-consumption based upon family income is .3(30,000 + 100,000) = $39,000 and the loss would be −$9,000. It would seem that somehow the surviving spouse is better off financially now that their spouse has died.Such incongruous results are some of the issues that have created a split among forensic economists concerning whether consumption should be based upon income of the family or income of just the decedent. In a recent survey (Brookshire, et al., 2006), the following question was asked: “Given no legal constraints, do you deduct consumption from the decedent's income or family income?” 53.4% indicated they would use the decedent's income and 46.6% indicated they would use family income. Comments provided showed a wide range of reasons for supporting either side. For example, several stated that using decedent's income was a matter of fairness, while those using family income cited the fact that published studies measuring self-consumption are based upon family income. A similar question, with the addition of a numerical example for clarity, was asked in the 2009 survey and the numbers changed significantly. 38.7% indicated they would use the decedent's income while 61.3% would use total family income, a swing of about 15 percentage points. Still, there is no consensus concerning this question among forensic economists. (Brookshire, et al., 2009)There may be little difference between using the decedent's income versus family income. If, say, the husband died and he was the sole breadwinner, then decedent's income and family income are identical. Further, there would be only a small difference if the surviving spouse worked part-time or at a relatively low-paying job. On the other hand, if the deceased were the individual with relatively low earnings in the labor market, then the difference would be significant.The decision to use either the decedent's income or family income may not be within the economist's discretion; the economist must follow controlling legal guidelines. Section II will discuss legal parameters in some states, although this paper will not provide a state-by-state review.Section III will begin with a review of benefits that can be obtained from marriage. This information will primarily come from the general economics literature. It will then be shown that the specific benefits present in the marriage are a key factor determining whether one should use total family income or the decedent's income when estimating self-consumption. This Section will then describe two key models outlined in articles by Roy Gilbert (1991) and Christopher Bruce (1997). One model, favored by both Gilbert and Bruce, concludes that decedent's earnings are the proper bases for estimating self-consumption while the other model concludes that total family income should be utilized.Based upon this review, Section IV will discuss the significant arguments for utilizing either the decedent's income or family income as the basis for self-consumption. The final section will provide the summary and conclusion. It is the opinion of the authors that although there are arguments for using decedent's income, forensic economists should use family income for both theoretical and practical reasons. This, of course, assumes that the governing law allows flexibility in this decision. One major reason is that an advocate for the decedent income approach cannot calculate and/or explain to a trier of fact how the nature of a particular marriage or how utility measurements of a particular surviving spouse should modify conclusions from the family approach.It is our view that the forensic economist begins compensatory damages calculations with the overall guidance of the “make-whole” doctrine. For any category of compensatory damages in wrongful death, the forensic economist should do her best to calculate the amount of damages which are most likely to restore survivors to the financial condition where they would have been but for the wrongful death. Further, the forensic economist should only vary from this make-whole principle when legal parameters clearly direct a departure, such as ignoring attorney fees when calculating economic loss.A related point is that the professional and academic specialties of “law and economics” and “forensic economics” have one fundamental difference. In the former specialty, research and writing often focus on what legal parameters should be and on the likely effects of new or changed legal parameters. Forensic economists, on the other hand, take legal parameters (as they can best understand them) and calculate economic losses within the confines of applicable legal guidelines. It is not the prerogative of a forensic economist, for example, to somehow adjust calculations in one category of compensatory damages because she perceives that legal parameters generally, or for another category of damages, are unfair or inappropriate.While a state-by-state survey on decedent's income versus total family income deductions is beyond the scope of this paper, we have reviewed the literature and relevant citations where legal parameters are discussed. The state-by-state articles in the Journal of Forensic Economics are particularly useful. Our discussion begins with California, where Gerald Martin (2004) and others believe that applicable court decisions force forensic economists to apply self-consumption deductions only to the income of the deceased. Barry Ben-Zion (2004) discusses this legal parameter in his article on economic damages in California.We generally agree with the presumption that the California directive against consideration of the financial condition of heirs prevents a family income approach to self-consumption deductions. This, however, is contrary to the goal aimed at making survivors whole. Indeed, the likely spirit of relevant court language is to prevent a properly calculated net loss of earning capacity to survivors from being diminished because the surviving spouse either had a large earning capacity or personal wealth. When the specific issue of personal consumption deductions is squarely before appellate courts in California, we shall see if the California presumption changes. The decedent's income approach to consumption deductions in two-earner households represents, in our opinion, a variance from the make-whole doctrine. If this variance is clearly addressed, the debate in this paper may remain of only academic interest to California economists. If the legal guideline is now or becomes ambiguous, it can be argued that a forensic economist should stick with the make-whole principle.We have seen no analyses or court citations in the literature for other states that constitute a legal directive to a forensic economist on this issue. In Kansas (Krueger and Ward, 2005) and Missouri (Krueger and Ward, 2003), for example, there is no legal parameter identified which forces the economist to take consumption deductions out of decedent's income versus total family income. The amount of personal consumption is to be that which was most likely by the particular decedent. Moreover, in those states where “personal maintenance” deductions are required from the earning capacity of the deceased, no further requirement affects the deceased income versus total family income choice. As will be discussed in a later section, forensic economists in “maintenance” states must also take a position on this issue.The focus of this article, whether the forensic economist should use total family income or the decedent's income as the basis for estimating self-consumption, is critically linked to the assumed benefits of marriage. In death cases where the deceased is the husband or wife, what are lost to the survivor are the benefits arising from the marriage that no longer exist. It will therefore be useful to first outline these benefits. Further, this section will examine which benefits from marriage are emphasized by forensic economists. A simple numerical example is then given which clarifies under what circumstances it is reasonable to utilize total family income or decedent's income. In addition, two other bases of self-consumption are presented—that no self-consumption should be deducted and that self-consumption is based upon not only private goods such as food and clothing, but a “fair share” of expenditures for public goods.A. Benefits From the MarriageThe literature concerning the economics of marriage has been around for a long time, and it is part of the study of the household. Early models stressed that the family attempted to maximize household utility by producing commodities utilizing inputs either purchased through the market or through time provided by household members. Purchased inputs, in turn, were paid for primarily by devoting time in the labor market.The question of how household members should allocate their time to maximize utility usually boiled down to a discussion of comparative advantage. This often meant that the man devoted his time to labor markets and the woman to household services—or at least arranged her career to maximize the husband's income and chances of promotion. However, the economic benefits of comparative advantage have been declining given that more women are participating in the labor force and their earnings have risen relative to that of men. Further, there has been a growing realization that specialization has severe drawbacks as well as advantages. The question, then, is why does marriage continue to be an attractive option?One answer is that there are significant non-economic benefits, which is certainly true. But more important for this discussion, is that there are other economic benefits besides comparative advantage. (See, for example, Blau, et al., 2006)B. The Benefits of Marriage Assumed By Forensic EconomistsThe benefits of marriage that are implicitly or explicitly utilized by forensic economists can be discerned by looking at the self-consumption tables that are standard in the forensic economics literature. Krueger (2007) calculated self-consumption for husbands and wives using CEX microdata. Of interest is the method employed to determine self-consumption. Following the lead of Patton and Nelson (1997), Krueger breaks down consumption into three basic categories. First, some goods and services are calculated by dividing total expenditures by the number of members in the family. An obvious example is food, clothing, and medical costs. It should be noted that for some categories of expenditures, such as liquor, this division may be for a subset of the family such as all adults. These expenditures would be considered private goods, and hence viewed as self-consumption. More formally, one may define self-consumption as a private good where utility is provided to the individual but has no effect on any other member of the household.There are also goods and services that are not divisible such as the TV, home furnishings, lawn care, and others. These are public goods, which simultaneously enter the utility function of all household members. Expenditures in this category are normally not considered when calculating self-consumption. As noted earlier, public goods and services may be either positive or negative. For example, the husband may love the 60-inch TV, but the wife despises its presence.A third category is semi-divisible goods and services, which is simply a hybrid of the first two categories. Krueger (2007, p. 20) lists several expenditures in this category. For example, in a household of two adults, newspapers and magazines are assigned 25% to each adult and 50% as non-divisible.Examining the self-consumption tables of Krueger or Patton and Nelson, it is clear that the only economic benefits from marriage are related to public goods and that self-consumption rates are based upon estimates of total family income. There is no explicit accounting for economies of scale, externalities in consumption, risk pooling, or any other benefits. Further, the benefits are valued at cost. In terms of private goods such as food, this assumption seems reasonable. However, the value of public goods such as housing and appliances may vary greatly between members of the household, especially if one member is the primary decision maker with regards to a particular purchase.C. The Gilbert and Bruce ModelsGilbert (1991) and Bruce (1997) both lay out two types of models that clearly show the conditions where it is reasonable to utilize total family income or the decedent's income. As will be evident, the models make different assumptions concerning the benefits of marriage. One model will be based upon the traditional consumption tables where goods are primarily divided between private or self-consumption goods and public goods. The other model will add an additional marriage benefit–namely, externalities in consumption.The first model described by Gilbert is called the “family income approach” which leads to using family income as the basis for self-consumption. It is the model that most closely follows the economic logic of standard self-consumption tables. There are a couple of ways that would seem to justify this approach. To make the discussion more concrete, we shall use the example given at the introduction of the paper. In that example, the following was assumed: In both the Gilbert and Bruce articles, their examples assume that c is constant for all levels of income. This is obviously a simplification since in reality the consumption rate falls as family income rises. However, this assumption of a constant consumption rate will not affect the main conclusions of the paper.Using the family income approach,There are several ways of explaining this approach. First, consider the loss from the husband's perspective as the survivor. Prior to the wife's death, the benefit from the marriage consisted of his own self-consumption and sharing of the public goods produced. His self-consumption was 30% of total family income, or .3(130,000) = $39,000, which we assume was the same as the wife. In addition, since both the husband and wife directly consumed 30% of family income, 40% of the expenditures were on public goods that provided equal benefits to both. The value of the public goods was .4(130,000) = $52,000 based upon the assumption that public goods are valued at cost for both spouses. Thus, total benefit to the husband prior to the wife's death was his self-consumption plus the value of the public goods, or 39,000 + 52,000 = $91,000. After the wife's death, he has his own income of $100,000, which will presumably be spent entirely on himself. Thus, the net loss due to the death of the wife is (91,000 – 100,000) = −$9,000.There is another way of looking at this, which is emphasized in the article by Bruce. The “family income approach” is equivalent to the models that Bruce labels either the “Marriage of Convenience” or “a Marital Partnership.” Marriage is a business and one does not enter a business unless it is profitable. This model estimates loss by looking at the loss in “profits” that has resulted from the death of the wife.What was the profit to the husband? The “revenue” was the extra consumption he obtained by marrying the wife. The revenue consisted of $9,000 in self-consumption for himself (=.3*30,000) paid for by the wife and $12,000 in public goods purchased by the wife (=.4*30,000). We assume that public goods obtained by either spouse are shared equally by both spouses. Thus, the total “revenue” earned by the husband is $21,000. However, there is a cost to this arrangement—namely, that part of his income he must give to the wife for her self-consumption equal to $30,000 (=.3*100,000). Thus, his “profit” from this arrangement is equal to (Revenue – Cost) = (21,000 – 30,000) = −$9,000. In this example, the arrangement was not profitable—at least when only earned income is considered.It should be noted that a similar calculation would reveal that the “profit” earned by the wife was $61,000. She obtained $30,000 in self-consumption financed by the husband (=.3*100,000) plus $40,000 in public goods paid for by the husband (=.4*100,000) minus her contribution to the husband's self-consumption equal to $9,000 (=.3*30,000). The total profit earned by both husband and wife was $52,000.But both Gilbert and Bruce prefer an alternative model. Gilbert calls his preferred model “the welfare approach,” which Bruce labels the “idealized marriage.” Basically, in this model the couple marries for love, not to enter into a business agreement. The model comes to the conclusion that the base for calculating self-consumption should be the income only of the deceased. In terms of our example, the loss given this model, AIM, is calculated as follows:Note that the difference between the two models is Using the second model will produce a larger award by the amount of the wife's self-consumption from the husband's income, cYh. In our example, that is $30,000.The reason that Gilbert and Bruce believe this is correct is that cYh is not viewed as an expense like spending money on labor or capital. Rather, it is spending money on a final good or service that itself provides utility. The question is, then, are these expenditures, cYh, similar to spending on capital or labor that are simply costs to obtain revenue, or are they part of the consumer's market basket generating utility?As Bruce points out, it depends upon how one views marriage. Is it for love or is it for convenience? If we think of self-consumption as consumption that does not enter into the utility function of other family members, the implication of the model is that there really is no self-consumption—at least that portion paid for by the surviving spouse. Rather, utility functions are interdependent to the extent that anything the surviving spouse spends on the decedent spouse increases utility directly.Which model is most appropriate is, as stated in Bruce, a function of a number of factors. One consideration is what kind of marriage did the plaintiff have? A second point is that if one of the spouses makes considerably more than the other, then marrying for money does not make sense. In that case, marrying for love is the more likely case.Ward (1999) looked at the issue addressed here—specifically, the proper basis for determining the decedent's personal consumption in wrongful death litigation. He first examines economic considerations that would support the use of total family income or decedent's income.Ward, like Gilbert and Bruce, is stating that expenditures by the surviving spouse used for self-consumption by the (now) deceased spouse was not some cost in exchange for other goods and services provided, but an expenditure that itself provided utility. This idea is brought out clearly in the above quote where Ward refers to such expenditures as “gifts.” Ward further implies in his chapter that using the net welfare-loss approach may be a way of calculating less quantifiable losses. In fact, he states that the welfare-loss method may not be appropriate if hedonic losses are calculated separately (p. 393).Another implication of Ward's argument is that whether the net-loss method or the welfare-loss method is used depends upon what kind of marriage the surviving and now-deceased spouse had. To support the use of the welfare-loss method, he gives the example of a couple which has a pleasant lunch together every week. If the surviving husband paid for the lunch, certainly he received utility from both his own lunch and having the company of his wife. But as Ward points out in the notes to the chapter, “The spouse may have hated to have lunch with the decedent and the cooking of Christmas dinner may have been the source of great stress and discomfort for the spouse.” (p. 395, note 4) Further, in a subsequent note he writes, “Again, this assumes that survivors rationally spend their time and resources on family members. Direct evidence of a poor relationship between the decedent and survivors might require an alternative methodology.” (p. 395, note 5)We can again analyze the total benefits of the marriage but assuming decedent's income as the base for self-consumption rather than total family income. If the wife dies, the husband's loss is the wife's income minus self-consumption funded by her own income, or $30,000 – $9,000 = $21,000. Similarly, if the husband dies, the wife's loss is the husband's income minus self-consumption funded by his own income, or $100,000 – $30,000 = $70,000. The total benefits of the marriage are, then, $91,000. This is $39,000 higher compared to using total family income as the self-consumption base. $39,000 equals the sum of the self-consumption of the wife funded by the husband, $30,000, plus the self-consumption of the husband funded by the wife, $9,000.D. Thornton and Schwartz Model and Depperschmidt ModelThere are four other articles found in the forensic economics literature that will be briefly discussed. Neither the Thornton and Schwartz articles (1991 (1992) nor the Depperschmidt articles (1991,1997) directly analyze the issue of whether one should use total family income or decedent's income as the base for self-consumption. Nevertheless, their conclusions fit in with the above discussion, and they also represent opposite ends of the spectrum in terms of the proper base for self-consumption.In both of their articles, Thornton and Schwartz emphasize that the deduction for consumption is unjustified. They cite several reasons, but the most prominent is that it does not adequately serve as deterrence to wrongful acts. If the wrongdoer kills rather than maims an individual, the compensation will normally be less. The authors believe the proper measure of damages is the person's lifetime utility. A rather imperfect measure of lifetime utility would be net earnings (gross earnings minus taxes) without any deduction for personal consumption. Not only would this approach simplify the calculation of loss and better deter wrongful acts, but it would also resolve a number of other thorny issues such as how to calculate the loss of a minor.Depperschmidt in his 1991 article and a later follow-up article (1997–1998) takes as given that personal consumption should be deducted from the decedent's income. There are, in fact, three approaches that can be used. One approach is termed personal maintenance, which states that only consumption necessary to sustain life or to sustain the person's earning capacity should be deducted. The second approach is what he terms the survivor's standard of living, and relates to determining the level of support provided by the deceased to the survivors. More formally, it attempts to maintain the same level of utility for the survivors after death as prior to death. The approach generally counts as consumption only those expenditures spent directly on the deceased that had no benefit to the survivors such as food and clothing. However, it does not include so-called public goods since these goods benefit all members of the household. Finally, there is what he terms the personal consumption approach. In addition to personal expenditures for the deceased, it includes some share of common costs such as shelter. The logic of this approach is that someone has to pay for these goods and there is no reason why the decedent should not pay a proportionate amount.Depperschmidt (1997–1998) recommends the very simple rule of taking household expenses and simply dividing by the number of family members. As he states,The two sets of authors, then, come to opposite views concerning personal consumption. Although Thornton and Schwartz support not deducting self-consumption for a number of reasons, one can view this conclusion as derived from an assumption that all goods consumed by the family are public goods. This may arise either from the nature of the goods consumed or there may be extreme interdependencies in the consumption of various goods. If all goods are public, then there is no self-consumption of the deceased (or any other family member), and hence there is no self-consumption to subtract. The loss is the entire decedent's income. Basically the concept of self-consumption, which by definition is consumption that has no effect on other household members, has been assumed away.At the other extreme, Depperschmidt advocates that consumption should be based upon total household expenditures divided by the number of family members. If there is a family with two adult members and total expenditures are $100,000, then consumption of the deceased is $50,000. That figure is subtracted from the income of the deceased. With regards to public goods, expenditures are equally divided among all family members.E. The Models ComparedWe have, then, four different models concerning the benefits of marriage and hence the proper method of estimating self-consumption in a death case. Although advocated for different reasons, all four models can be viewed as assuming different levels of public goods vs. private goods (or self-consumption goods).Given our previous example, for a marriage of convenience the loss is the decedent's income minus self-consumption based on total family income. For both spouses, assuming that L represents loss, Total benefits of the marriage would add the benefits lost by the surviving spouse given the death of either the husband or wife. As pointed out earlier, total benefits from the marriage equal $52,000, which is the amount spent on public goods.However, if one uses the idealized marriage model, then the loss is: Total benefits of the marriage are $91,000, an increase of $39,000. This model counts as a net benefit the amount spent by the surviving spouse on the now deceased spouse—in particular, $9,000 by the wife for the husband and $30,000 by the husband for the wife.One can also use this example to calculate the net benefits of the two polar cases discussed at the beginning of the paper. For Thornton and Schwartz, no self-consumption should be calculated. In that case, The total benefits of the marriage are total family income equal to $130,000. Nothing is subtracted from total income because, in effect, all goods are considered public goods, or characterized by externalities in consumption.For Depperschmidt, self-consumption is simply total income (or expenditures) divided by n, where n is the number of family members.The net benefits of the marriage are zero. This result naturally follows since for Depperschmidt, all expenditures are, in effect, pure private goods.Looking at all four models, the net benefits of the marriage range from $0 to an amount equal to total family income. Use of total family income and decedent's income are cases in the middle of the spectrum. The four different models make different assumptions concerning the importance of public goods and/or externalities in consumption ranging from no public goods present to all expenditures having these characteristics. It is worth noting again that neither Thornton and Schwartz nor Depperschmidt make this specific claim in their articles. They, in fact, make their recommendations based upon other arguments. However, the self-consumption rules they advocate can be viewed within a framework of the importance of public goods in the household budget.F. Some Thoughts From the General Economics LiteratureA critical issue raised in the previous section was whether the marriage was for convenience or for love? Was it a marriage where the partners weighed costs and benefits or one characterized as an “ideal” marriage? The marriage for love or the ideal marriage depends upon a harmonious relationship where there are few differences concerning how family funds should be allocated. Although some marriages may be characterized in this fashion, many are not. There is, in fact, a substantial literature which examines how resources are allocated within the family. Rather than all family members having the same utility function, there is frequently bargaining over family resources. Put simply, family members disagree on what to spend money on. This literature, while not necessarily supporting the idea that all marriages are strictly for convenience, does question whether the idealized model of marriage can characterize many families. (See Blau, 2005 and Jacobson, 2007) for reviews.)Most simple models of the family do not look specifically at the question of how goods and services are distributed within the family. Often what is assumed is that all family members have identical tastes or a “benevolent dictator” distributes resources so as to maximize the family's utility function. However, it is unrealistic to assume that all tastes are identical. This may lead to bargaining over resources, or dividing up the total and allowing different members spending money according to their own tastes. Couples may differ as to how much to spend on children, where to go on vacation, and in what kinds of restaurants they wish to eat. Further, what is a public good or positive externality to one person can be a public “bad” or negative externality to the other.If, in fact, bargaining does occur, then spending within two families that have identical resources will be different if the bargaining power of the decision-making parties differs. Lundberg and Pollak have done a significa