Selecting the Discount Rate (2017)

Recently Economica undertook a detailed re-evaluation of our recommendations concerning the discount rate. We argue that plaintiffs have available two alternative methods of investing their awards for future losses. In the first, which we call the annuity approach, plaintiffs use their awards to purchase life annuities or structured settlements. In the second, which we call the active management approach, plaintiffs invest their awards in portfolios of secure financial products, such as government bonds and “blue chip” stocks.
We find that the real rate of return is higher using the active management approach than the annuity approach – approximately 2.5 percent versus zero percent. At the same time, however, the risk that plaintiffs’ investments will be depleted before they die is much greater if plaintiffs manage their investments than if they purchase annuities. Accordingly, it may be that risk averse plaintiffs would prefer to purchase annuities than to manage their own portfolios even if they earn a lower rate of return.
We conclude that, as economists cannot know how risk averse individual plaintiffs are, our role should be to calculate two values for each future loss – one using zero percent and one using 2.5 percent. It will then be for the court to decide which discount rate is relevant to the particular plaintiff facing it.

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Estimating the Income of an Aboriginal Plaintiff: Recent Evidence

In this article, we discuss the average income, educational attainment, unemployment, and participation rates of aboriginal Canadians (relative to non-aboriginals), as well as the economic outcomes of aboriginal peoples living on reserves. We then outline the adjustments to the income estimates, based on the latest census data, we feel are reasonable.

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The Discount Rate Simplified

In this article, which was written collaboratively by Christopher Bruce, Laura Weir, Kelly Rathje, and Derek Aldridge, we begin by setting out a number of criteria that we believe should be met when selecting the discount rate. We ultimately conclude that a portfolio of Government of Canada bonds of varying maturity dates meets our criteria. We then argue that forecasts of Government of Canada bond rates that are based on historical statistics are unreliable for many reasons. Finally, we argue that the rates of return that are currently available on government bonds represent reliable predictions of future rates. Short-term interest rates can perform this role because they represent rates that are actually available currently; and long-term rates reflect the forecasts that have been made by sophisticated financial institutions that have substantial investments in the market.

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The Discount Rate Revisited (Spring 2008)

This article reports on our latest survey of discount rates. We conclude that no changes to our existing discount rate assumptions are warranted, though a reduction in our long-term rate may be necessary in the future if the observed long-term rates remain significantly lower than our assumed rate.

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