Delayed compensation for lost income |
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Authors: | John W Pratt Richard Zeckhauser |
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Institution: | 1. Graduate School of Business Administration, Harvard University, 02163, Boston, MA 2. John F. Kennedy School of Government, Harvard University, 79 Kennedy St., 02138, Cambridge, MA
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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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