Net Discount Rate Research Articles

Retiring the Historical Net Discount Rate

Abstract The methodology of using a net discount rate (“NDR”) to calculate the present value of future labor earnings is now over 50 years old. First found in public health economics, the earnings NDR later reached forensic economics where it was adapted to other calculations such as the present value of medical costs. At first, some forensic economists embraced the historically determined wage NDR arguing that it was simple, fair, and 0% since annual wage growth and interest rates had been fairly equal to that time. The 0% wage NDR did not sit well with some other forensic economists, and so a discourse began in the literature regarding its numeric value. Largely missing from the debate has been an analysis of the historically determined NDR, as it has been constructed and used, as a legitimate present value methodology. Building upon the initial criticisms of the NDR by Jones (1985, 1986) and the recent work of Foster (2015), this article examines the historical wage NDR method and concludes that, for several reasons, it is theoretically faulty, empirically inconsistent, and not relevant to forensic economics.

Foreign Net Discount Rates: The Case of Undocumented Mexican Workers

While undocumented immigrants have standing to sue in state and federal courts in the United States, the number of legal cases dealing with the question of measuring damages awards is limited. Although the approaches taken by courts differ widely, a common past approach has involved foreclosing damages recovery to undocumented workers. Some courts, however, have allowed damages awards based on wages in the undocumented worker's country of origin. As the issue of how to correctly estimate damages of undocumented workers arises going forward, it is reasonable to expect that forensic economists will be required to estimate damages awards based on foreign wages. As an effort to equip forensic economists with the tools to conduct such estimates, this paper addresses the issue for the case of Mexican undocumented workers. First, the paper reviews developing case law on the subject. Second, based on official sources, time series data on interest rates and Mexican annual wages by industry since 1980 are investigated and reported. Third, the historical net discount rate (NDR) is discussed and proposed as a methodology to estimate damage awards. Fourth, NDR stability is discussed. The paper concludes by summarizing the findings and offering concluding comments.

Predicting Net Discount Rates: A Comparison of Professional Forecasts, Time-series Forecasts and Traditional Methods

AbstractPrevious research proposed two future net discount rate estimators that improved on naïve long-term average and random walk estimators. The proposed estimators were superior in the class of estimators that used only current and past observations on net discount rates. In this paper we consider two extensions. First we examine whether professional forecasts perform significantly better than the two alternatives. Second, we examine the properties and performance of multivariate estimators that account for the potentially differing time-series behaviors of the underlying wage growth and interest rate series.

Forecasting the Periodic Net Discount Rate with Genetic Programming

This paper examines the periodic net discount rate using genetic programming (GP) techniques to build better short-term forecasts. Standard GP techniques require human judgment as to which data window to use, which may be problematic due to structural breaks and persistence (or long memory) in the net discount rate. We use a recently developed extension of GP to overcome this problem. While our results show no significant out-of-sample forecast improvement relative to the linear alternative or random walk model over the full sample, they do provide evidence as to the stochastic nature of the net discount rate considering the AR(3) model yielded lower forecasting errors in the post-1982 sample.

Testing for a Unit Root in the Net Discount Rate: A Survey of the Empirical Results

This study provides a survey of the empirical results associated with testing for a unit root in the net discount rate. As suggested by the literature, the use of the historical average of the net discount rate in the calculation of the present value of lost future earnings is valid if the net discount rate follows a mean reverting, stationary process. However, if the net discount rate follows a mean averting, non-stationary process forensic economists should perhaps use the current value of the net discount rate in such calculations. A majority of the studies surveyed indicate that the net discount rate experienced a structural break in the late 1970s-early 1980s. In general, if the net discount rate is stationary as a result of a structural break, forensic economists should use the average net discount rate over the post-break period.

How Much Confidence Do We Have in Estimates of Future Net Discount Rates?

A recent survey by Brookshire, et. al., (2006) suggests that forensic economists are mixed in their use of current versus historical data to estimate future net discount rates.1 Typically the choice is between a long-term average or simply the current prevailing rate.2 Cushing and Rosenbaum (2006) proposed an estimator that optimally uses the information in the past behavior of net discount rates to forecast future rates. Their optimal estimator is a weighted average of the current and long-term mean net discount rates with weights that depend on the degree of persistence in the net discount rate process and on the horizon over which one wishes to forecast future rates. Noting the practical impediments to calculating such an estimator, they proposed an alternate compromise estimator that equally weights the current net discount rate with a long-term average net discount rate. In this paper we extend that analysis by developing confidence intervals for the current, long-term average, optimal and compromise estimators. In particular, we develop both analytic and bootstrap estimates of 50% confidence intervals for all four estimators. The 50% boundary demarcates values that are more likely than not to occur. This serves two purposes. One is to shed light on error rates as is called for in Daubert (1993). The other is to help establish a reasonable degree of economic certainty in our net discount rate predictions. Results show that the boundaries vary by estimator and by forecast horizon. However, in almost all cases, the boundaries are within two percentage points of the point estimates. These boundaries generally narrow as the horizon increases. For the optimal and compromise estimators, the boundaries approach the point estimate plus or minus about one percentage point for a 20year horizon and beyond. Additional results show that the boundaries have remained quite stable over time, regardless of the estimator. Combining these results with earlier findings, the best range of predictions for the future net

On the Time Series Properties of Medical Net Discount Rates

We examine the time series properties of medical net discount rates based on five different medical consumer price indices, namely, medical care, medical services, medical care commodities, physician's services, and prescription drugs & medical supplies that were first analyzed by Ewing, Piette, and Payne (2003). Unlike Ewing, Piette, and Payne (2003), we test for the presence of a unit root in these series using statistics that allow for a break in the trend function at an unknown date, and find that all series are tend-break stationary. Therefore, practitioners should use medical net discount rate forecasts based on the estimated trend function in the post-break periods to calculate the present value of future medical costs.

The Time Series Behavior of the Medical Cost Net Discount Rate: Implications for Total Offset and Forecasting

Abstract No abstract available.

A Further Examination Regarding the Stability of The Net Discount Rate

Abstract No abstract available.

Accounting for Age-Earnings Profiles in Net Discount Rates

Abstract No abstract available.

Net Discount Rate and Below-Market Discount Rate: Two Methods in Forensic Economics

Abstract No abstract available.

Net Discount Rate Determination: A Reply

Abstract No abstract available.

On Testing for the Stability of the Net Discount Rate

Abstract No abstract available.

Selecting the Time Period Over Which the Net Discount Rate is Determined for Economic Loss Analysis

Abstract No abstract available.

The Net Discount Rate in a Model of Long-Run Growth Equilibrium

Abstract No abstract available.

The Relationship Between Age, Earnings and the Net Discount Rate Revisited

Abstract No abstract available.

Legislatively Imposed Net Discount Rates: Minnesota's Tort Reform

Abstract No abstract available.