Summer 1998 issue of the Expert Witness newsletter (volume 3, issue 2)

Contents:

  • The Effect of Alcoholism on Earning Capacity
    • by Nicole MacPherson
    • In this article Nicole MacPherson investigates the effect of alcoholism on earning capacity. She has found that alcoholism has both direct and indirect effects on earnings. Ms. MacPherson brings to our attention both the obvious and overlooked effects of alcoholism.
  • Applying Economic Analysis to Tort Law
    • by Christopher Bruce
    • In this article Christopher Bruce expands the use of economic analysis in tort law. Dr. Bruce identifies the distinguishing characteristics of the economic approach versus the more traditional methods of legal analysis. This is the first of a series of articles to follow regarding the economic analysis of torts.
  • Not All “Bears” Are Bordering Extinction
    • by Heber G. Smith
    • In this article Heber Smith explains how the claimant converts his or her award to income for the future. He contrasts mutual funds, with high returns and perhaps less stability, with annuities, having lower returns and lower risk. This discussion leads into future articles regarding strategies of structured settlements.
  • Doctors Are Not Experts on Life Expectancy
    • by David Strauss, PhD, FASA and Robert Shavelle, PhD
    • In this article David Strauss and Robert Shavelle argue that physicians are usually not experts on life expectancy. They note, however, that doctors’ opinions regarding life expectancy have been relied on by the courts. They identify the different roles of physicians and actuaries in life expectancy determination.
  • Software Review: Personal Injury Damages Partner (Carswell)
    • by Derek Aldridge
    • In this article Derek Aldridge reviews a CD ROM titled Personal Injury Damages Partner, available from Carswell. The CD contains a searchable collection of full text and digest summaries of personal injury cases.

Software Review: Personal Injury Damages Partner (Carswell)

by Derek Aldridge

This article was originally published in the summer 1998 issue of the Expert Witness.

The Personal Injury Damages Partner (PIDP) has the potential to be a very useful research tool for anyone specialising in personal injury damages. The software is a CD ROM product ($1,200 for a one-year subscription, with updates 6 times per year – see www.carswell.com) that runs under Windows 95, 3.1, and NT. Carswell describes the content as follows:

The information includes Goldsmith’s Damages for Personal Injury and Death which consists of digests of cases dating back to 1935. As well, the full text of selected cases dating back to 1986 have been included. Personal Injury Damages Partner also contains cross-references and topical indices in the Find infobase.

Certainly the information contained on the CD will be valuable to anyone involved in personal injury cases. However, learning to access this information (i.e., learning the user-interface) could be a daunting task for the less-advanced computer user. The CD does not come with any documentation, not even basic set-up instructions on the disc case – an unfortunate oversight. Advanced users shouldn’t have too much trouble getting started, but Carswell should do some work to bring this program up to the “ease of use” level that is expected these days.

Once I learned the basics of the program, I found it easy to browse through different personal injury topics. For example, one can easily browse through summaries of cases by injury type: hip injuries, paraplegia, brain injuries, speech impairment, and so forth. The case summaries are hyper-linked to the full text judgments which can be read on screen or printed. You can also easily browse through cases which were heard by a specific judge. And there is a general index that you can use to browse the cases. Browsing by topic worked well, but I found the search engine frustrating – I was able to construct queries but the results were not linked to the full-text judgments, summaries, or even the case name. The program simply showed me paragraphs from unknown judgments with my query words highlighted. Some good query examples should have been provided with the software.

The “front-end” interface (called Folio 3.1) which is used to access and search through the information on the disc looks and acts vaguely like a Web browser – there are coloured hyperlinks which you double-click with the mouse to jump to the destination. The Folio program is fairly easy to use, but I think it would be much easier to get up to speed if Carswell could set up their database so we could use our own Web browser to navigate the database. Unfortunately, the program’s help system is specific to the Folio user-interface and does not offer help that is specific to the Personal Injury Damages Partner.

One obvious question is what advantage does this program have over QuickLaw? Two important ones come to mind. First, the program focuses on personal injury cases, so one is not searching or browsing among countless decisions that do not concern personal injury actions. Also, since the product is contained on a CD, searching and browsing is much faster, and the program is more portable, than using the QuickLaw on-line service. Of course the CD media also has its disadvantages over QuickLaw – the information on QuickLaw is always up-to-date, while the information on PIDP is always out-of-date. Hopefully Carswell will eventually allow the user to access the very latest information over the Internet, otherwise, for the personal injury specialist, the PIDP can only be a companion to QuickLaw, not a replacement (assuming that having up-to-date information is essential).

This could be a very useful product if Carswell would improve the ease-of-use and offer a manual and some decent on-line help. As it is, PIDP will be great if you are willing to invest in a lot of training time (or if you are already familiar with the Folio 3.1 interface); but if you have very little patience for software that is not easy to use, then your time will be better spent improving your QuickLaw skills.

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Derek Aldridge is a consultant with Economica and has a Master of Arts degree (in economics) from the University of Victoria.

Doctors Are Not Experts on Life Expectancy

by David Strauss, PhD, FASA and Robert Shavelle, PhD

This article was originally published in the summer 1998 issue of the Expert Witness.

In personal injury cases, courts have traditionally relied on doctors for opinions on plaintiffs’ remaining life expectancy. We show here that such questions are really beyond the expertise of physicians, and that their testimony is readily challenged.

The analogy with life insurance is helpful. When applying for a life insurance policy you are first examined by a doctor, who assesses various risk factors. The results are transferred to the insurance company’s actuaries, who use the risk profile to assess your survival prospects. Thus both medical and statistical/actuarial skills are needed. Only a physician is qualified to appraise the individual, and only a statistician or actuary is qualified to turn the appraisal into a life expectancy.

Most physicians readily agree that they are not expert in actuarial issues. Nevertheless, pediatricians are still routinely asked to testify on the life expectancy of children with birth defects, while therapists or other medical specialists are consulted regarding adult accident victims. Their testimony on what are really statistical issues is often unfortunate. The following examples, with some modification, are drawn from actual cases.

“As a gerontologist I work with elderly persons. All the persons with cerebral palsy that I examine are at least fifty years old. Therefore I believe that this child with cerebral palsy will probably live to at least 50.”

We pass over this in silence.

“I believe that this child will certainly live to age 40, although probably not to age 50.”

It is, of course, absurd to say that any child – even one in perfect health – will “certainly” live to any age. Further, the probability that the age at death will fall in a narrow range such as 40-50 is bound to be quite low. The statement seems to confuse the life expectancy, which can often be estimated with some precision, and the actual age at death. The latter can rarely be predicted with any accuracy.

The annual mortality rate for children like the plaintiff is 1%. After 50 years, therefore 50% [ = 50 x 1%] of such children would have died. The median survival time is thus 50 additional years.”

There are two mistakes here. First, the math is wrong: in fact, 99% of the current survivors will survive one additional year, and therefore the proportion surviving 50 years is 61% (=.9950), not 50%. Second, the analysis ignores the dramatic increase in human mortality with age. As a result it gives wildly unrealistic long-term estimates, predicting, for example, that 37% of the population will survive to age 100.

* * *

Witnesses lacking statistical or actuarial training are frequently unable to define life expectancy, compute it in a simple case, or distinguish it from the median survival time. This may be exposed with a simple illustration.* If the witness cannot even explain what a life expectancy is, the testimony will lack credibility.

A physician’s opinion will be based either on a reading of the research literature or “on the basis of my clinical experience.” In the former approach, the plaintiff is matched to some group of individuals whose survival has been studied and reported. There are, for example, several studies of long-term survival for persons with cerebral palsy, traumatic brain injury, and spinal cord injury. Unfortunately such studies provide at best a crude estimate of life expectancy. The attorney can establish that:

  • The studies generally follow a cohort of persons who initially were of a given age and in a given condition. If the plaintiff is older and currently in this condition, it would be necessary to assume that cohort members surviving to the plaintiff’s age are still in that same condition. This assumption may be quite unreasonable, especially for young children who may have fair prospects for improvement.
  • Most studies provide survival curves, giving the fraction of persons in the cohort who survive to a given age. This will provide a median survival time only if the mortality is so high that 50% of the subjects die within the study period, and it rarely will permit the computation of a life expectancy.
  • The cohorts studied in literature are necessarily based on coarse classifications of one or two risk factors. Ironically, the clinician’s strength – the ability to make fine judgements about numerous patient characteristics – does not come into play.

It must therefore be recognized that published articles provide at best a rough approximation to a given plaintiff’s life expectancy. Indeed, some of the articles include a warning to this effect, a point that the opposing attorney may wish to emphasize.

Clinicians who instead rely on their experience for opinions are even more vulnerable. The lack of a solid basis can be revealed with questions such as:

  • How many patients closely resembling the plaintiff have you examined? [The answer will be at most a few dozen.]
  • Did you follow up on the survival or death of all of these patients? Give the specifics of your procedure. In particular, how did you follow the patients who moved to a different town or even to a different state? How did you ascertain who died? Where and in what form did you keep your records of the children’s survival time? Did you periodically reassess their functional levels during the follow up?
  • If you have been practicing for 20 years (say), how could you have ever observed a child surviving more than an additional 20 years? Does this lack affect your opinion? Why or why not?
  • Are you aware of the literature on statistical methods for estimating survival probabilities? Which methods did you use?

Such questions should make the limitations of the doctor’s expertise very clear.

Footnotes

* As an example, if 1/3 of members of a population will live exactly 2 more years, 1/3 will live exactly 3 more years, and 1/3 will live exactly 10 more years, then the life expectancy is (2 + 3 + 10)/3 = 5 years and the median is 3 years (the middle value). [Back to text]

References

1. Hutton JL, Cooke T, Pharoah POD. Life expectancy in children with cerebral palsy. British Medical Journal 1994; 309:431-435.

2. Chrichton JU, Mackinnon M, White CP. The life expectancy of persons with cerebral palsy. Developmental Medicine and Child Neurology 1995; 37:567-576.

3. Evans PM, Evans SJW, Alberman E. Cerebral palsy: Why we must plan for survival. Archives of Disease in Childhood 1990; 65:1329-1333.

4. Strauss DJ, Shavelle RM, Anderson TW. Life expectancy of children with cerebral palsy. Pediatric Neurology 1998; 18:143-149.

5. Strauss DJ, Shavelle RM. Life expectancy of adults with cerebral palsy. Developmental Medicine and Child Neurology, in press.

6. Roberts, AH. Severe Accidental Head Injury. London: Macmillan, 1979.

7. Strauss DJ, Shavelle RM. Long-term survival of children and adolescents after traumatic brain injury. Archives of Physical Medicine and Rehabilitation, in press.

8. DeVivo MJ, Stover SL. Long-term survival and causes of death. In: SL Stover, JA DeLisa, GG Whiteneck (Eds.), Spinal Cord Injury, pp. 289-316. Gaithersburg MD: Aspen, 1995.

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David Strauss, PhD, is a Fellow of the American Statistical Association and Professor of Statistics at the University of California, Riverside. He has frequently provided expert testimony on life expectancy in Britain, Canada, and the United States. He is director of the UC Riverside Life Expectancy Project, which specializes in the survival and life expectancy of persons with disabilities such as cerebral palsy and traumatic brain or spinal cord injuries.

Robert Shavelle, PhD, is a Visiting Professor at UC Riverside and a member of the Life Expectancy Project.

Not All “Bears” Are Bordering Extinction

by Heber G. Smith

This article was originally published in the summer 1998 issue of the Expert Witness.

Plaintiff counsel’s job respecting a personal injury action is securing an acceptable offer. All of his/her energies are expended to that end with the result that little attention is given to after-settlement considerations. Now that the claimant has the cash, how does he/she convert the cash into income to provide for lost future income or the cost of future care?

Impressive gains in the market have headlined all financial publications in recent years. Consider recent mutual fund advertisements citing returns of 20.8% in one year and 21.2% in two years. What sensible personal injury or wrongful death award would not be enticed by the siren of such gargantuan returns?

In contrast, today’s interest and annuity rates seem inordinately low and may drive investors that should seek safety to the equity markets. However, consider the risks and costs with embarking on such a strategy.

One risk that needs to be considered is the nature of equity markets. In many respects we may have become lulled into a false sense of security with the extraordinary increases over the past few years. Recent market volatility and uncertainty are causing many investors to rethink their positions. As a result there has been a movement toward higher quality equities and a resurgent interest in bonds. Another uncertainty that today’s investor faces is trying to determine the length of this increased volatility and uncertainty. Is today’s uncertainty merely a pause, or does it foreshadow a greater correction? Historically, the usual market uptrends have been sporadically dotted with significant downturns that have taken many years to recover to pre-correction levels. Under these conditions, recipients of lump sum awards fully vested in equity markets could become severely disadvantaged especially if the downturn was to last for an appreciable amount of time. In the current issue of Investment Executive, Carlyle Dunbar is quoted as saying: “though they [investors] won’t sell if the market drops, most aren’t expecting a drop of 20% or 25%. The reality has been that most investors – especially newcomers go into shock when a bear market develops.”

Another consideration is the fiduciary role of financial advisors who are governed by the “prudent-man” rule. Should a lump sum recipient retain a financial advisor, it is likely that their risk position be classified as conservative. Under this classification, a recipient’s assets would be allocated across equities, fixed income and cash equivalents. The fact fixed income and cash equivalents typically return less than common equities would preclude the possibility that the recipient would achieve the type of returns advertised by many funds.

The prudent man rule dictates that, amongst other criteria, a financial advisor provides for “reasonable diversification”. Such diversification might suggest a common 50/40/10 (equity/bond/cash) portfolio investment split. Some formulas may suggest a 60/30/10 but the former may be more responsive for an investor requiring income. Consider the following example:

Equity Bond Cash
Percentage Allocation 50% 30% 10%
Assumed Return 10% 5.5% 3%
Management Fee 2% 1% 0.5%
Tax 20% 40% 40%

Weighted Average, Net After Tax Rate of Return: 4.53%

Given that the above strategy assumes a high measure of equity exposure, one may wonder why the recipient of a personal injury award or wrongful death settlement might not consider a structured settlement when the net return is approximately 5.5% (the equivalent of a pre-tax rate of return of 9.17% for a tax payer in a marginal rate of 40%). An investment strategy, incorporating a structured settlement tailored to the specific circumstances of the claimant, will result in superior returns at a lower risk.

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Heber Smith is the principal of Smith Structured Settlements Inc. a structured settlement and annuity brokerage with offices in Calgary and Vancouver. He is also a partner in Structured Settlement Software, a firm that provides tax driven software to the American structured settlement industry.

Applying Economic Analysis to Tort Law

by Christopher Bruce

This article was originally published in the summer 1998 issue of the Expert Witness.

Economists have made important contributions to the analysis of many areas of the law – particularly competition law, labour law, regulation, and international trade – during the last 200 years. It is only in the last quarter century, however, that economists – and legal scholars using economics – have turned their attention in a systematic way to the analysis of torts, contracts, and criminal law. In spite of the youth of the sub-discipline that investigates these branches of the law, it has quickly become a major force within U.S. and, to a lesser extent, Canadian and European law schools. All of the major U.S. law schools – Harvard, Yale, Princeton, Chicago, Stanford, and Berkeley among them – now offer courses in the Economic Analysis of Law and have professors with Ph.D.s in Economics on faculty. (Only the University of Toronto, among Canadian schools, has followed suit.)

Those reading this newsletter will be familiar with some elements of the economic analysis of personal injury damages – for example, through my textbook Assessment of Personal Injury Damages (Butterworths, 1992). But economics, being the imperialistic science that it is, has not stopped there. Economic models have been applied to virtually every aspect of tort law – negligence rules, causation, onus of proof, intentional torts, informed consent, volenti, to name only a few. I do not wish to claim that the economic analysis of these doctrines should supplant the traditional legal analysis. However, I do think that there may be situations in which practitioners may find it useful to consider some of these issues from a different angle.

In this article, and a number of others to follow it, I would like to provide some insight into one such angle – the economic analysis of torts. In this introductory article, I begin by identifying the primary characteristics that distinguish the economic approach from more traditional methods of legal analysis. I then use this approach to discuss collateral benefits and negligence rules.

Characterising the Economic Analysis of Torts

Two fundamental characteristics distinguish the “economic” analysis of torts from other approaches to the study of tort law.

First, economists take a “positive,” or “scientific” approach to the identification of legal doctrines. Instead of trying to determine what the law “should be,” economic analysts attempt to determine what the law “is.” That is, they use the deductive approach to derive hypotheses about the principles which underlie judges’ reasoning and then test those hypotheses by comparing their predictions against the decisions which judges have made. As a simple example, economic analysis can be used to “predict” that the courts will, under most circumstances, reject the defence of “custom.” That prediction can be “tested” by observing whether the courts do or do not accept that defence.

Second, all economic analysis of tort law begins from the working hypothesis that judges behave as if they were attempting to devise legal rules which would encourage individuals to maximise social benefits net of social costs. (For example, if there is some accident-avoiding behaviour whose cost is less than the resulting saving in accident costs, the courts are predicted to adopt rules which will encourage adoption of that behaviour.) It is not argued that judges consciously act in this way; simply that the doctrines that have been selected by the common law courts have developed as though this was the goal of the courts.

This view of the functioning of the courts suggests that the courts will behave as if they were employing an ex ante (or “forward-looking”) approach to decision-making. In this approach, the courts recognise that any decision they make in the current case may influence the behavior of parties in similar, future cases. Hence, it becomes important to set a precedent which will direct future parties to behave in the socially desirable manner.

This approach can be contrasted with the traditional view of the court’s decision-making process, which I call the ex post (or “backward-looking”) approach. In this approach the court is assumed to take the position that, as the tortious act has already occurred, that act cannot be undone. Rather, all the legal system can do is to ensure that the victims are restored, as well as possible, to the position they would have been in had the act not occurred. Contrary to the economic assumption, no thought is given to the impact which decisions will have on future behaviour.

The ex post view is common to most textbooks and was given its most famous expression by the Supreme Court of Canada in Ratych v. Bloomer. There, Justice McLachlan concluded that the function of damages in tort law was to “restore the plaintiff to his pre-accident position.” Further, she emphasised that

[t]he law of tort is intended to restore the individual to the position he enjoyed prior to the injury rather than to punish the tortfeasor whose only wrong may have been a moment of inadvertence. [Emphasis added]

That is, the Court has said that tort damages are intended strictly to compensate harms that occurred in the past, not to deter negligent behavior that might occur in the future.

The response which those who rely on “positive” analysis of the law make to this argument is that the most reliable way to determine what someone thinks is to observe what they do, not what they say. In short, the best way to identify the underlying principles of tort law is to review the courts’ decisions, not their arguments. What I propose to argue in the following sections is that the courts’ decisions can often be more easily understood if it is assumed that they are trying to influence future behavior than if it is assumed they are attempting to “right past wrongs.”

The Collateral Benefits Rule

A clear example of the courts saying one thing and doing another arises in their interpretation of the “collateral benefits rule.” On the one hand, the Supreme Court has made it clear that it prefers the ex post approach. On the other hand, the trial courts have consistently adopted the ex ante approach.

1. Orphaned Children: Consider for example the situation in which orphaned children have been taken into the care of relatives.* Although Ratych would appear to suggest that the children’s claim for loss of dependency was thereby extinguished, most of the decided cases have rejected this view. The trial courts have recognised that the plaintiffs would be “double compensated” but have argued that to deny compensation would be to establish a dangerous precedent for future cases.

The leading statements of the latter view appear in Tompkins (Guardian ad litem of) v. Byspalko (1993) 16 C.C.L.T. (2d) 179 and Ratansi v. Abery [1995] 5 B.C.L.R. (3d) 88. In both cases, the trial judges argued that if Ratych was followed, the risk would be created that

… in some cases, family members who would otherwise take orphaned children into their care may decline to do so until or unless an award has been made in the children’s favour.

And in Tompkins, Spencer, J. went further, arguing that “… a surviving parent may refrain from remarriage, advantageous from the children’s point of view, because the presence of a new spouse who replaces services to the children may reduce their award”

2. Charitable Donations: Similarly, the rationale that is commonly given for the “charity exception” is that to deny a plaintiff compensatory damages because he or she had received a charitable donation would discourage individuals from making those donations. A clear example of this principle was stated in the Northern Ireland case of Redpath v. County Down Railway [1947] N.I.L.R. 167 where Andrews L.C.J. noted that if

the proposition contended by the defendants is sound the inevitable consequence in the case of future disasters of similar character would be that the springs of private charity would be found to be largely if not entirely dried up.

Surprisingly, further confirmation of this view comes from the author of Ratych, Madam Justice McLachlan. In her dissent in Cunningham v. Wheeler (1994) 113 D.L.R. (4th) 1 she argued that “… people should not be discouraged from aiding those in trouble.”

3. Implications: The common thread running through all of these decisions, I would argue, is that the courts will often consider the impact that their current rulings can be expected to have on individuals’ future behavior. In this view, the function of torts is not merely to compensate particular plaintiffs for past wrongs, but is also to protect potential plaintiffs from future harmful behavior. Children whose parents have been killed are to be protected against the possibility that their relatives may delay the adoption process; and victims of catastrophic events are to be protected against the possibility that donors may be discouraged from providing assistance.

This view opens a number of interesting possibilities for argument in similar future cases. For example, the practice has been to assume that a widow(er)’s loss of dependency comes to an end once she (he) remarries (assuming that the new spouse has a similar income to the first spouse). It could be argued, however, that this rule may encourage widow(er)s to postpone any relationships with the opposite sex until after the fatal accident case has been settled. As it cannot be in the public interest to discourage dating and marriage, a legal rule which has the effect of providing that discouragement may well be contrary to public policy.

In each case, economic analysts of the law would argue that the courts were behaving as if their goals were to encourage (socially) desirable behaviour and to discourage (socially) undesirable behaviour. In the next section, I will argue that it is rules of negligence which distinguish desirable from undesirable behaviour.

Negligence Rules

Assume the following facts:

  • One of the stop signs at the intersection of two country roads is knocked over sometime on Saturday evening.
  • The County responsible for those roads becomes aware of this on Sunday morning but decides to wait until Monday morning to replace the sign, in order to save $1,500 overtime pay to its road crew.
  • Sunday evening, Mr. A, unaware that the sign is missing, assumes that he has the right-of-way, enters the intersection without slowing, and collides with Ms. B’s car.
  • The two cars and their occupants suffer damages which total $5,000.
  • At trial, the court accepts the evidence of a traffic expert that the probability, per day, that such an accident will occur is 3/10 if there is no stop sign in place and 1/10 if there is a stop sign.

Was the county negligent? Traditional, ex post legal analysis has difficulty answering this question definitively. On the one hand, ex post analysis holds that the function of tort law is to compensate “worthy” victims, creating a presumption that the county should be found responsible. On the other hand, that analysis also argues that a defendant should only be found liable if he or she failed to take those actions that would have been taken by a “reasonable” person. But what actions would have been reasonable in this case? I will argue that the answer the courts will usually give to this question is consistent with the ex ante, or economic, analysis of the law.

In particular, if the function of the law is to encourage behaviour that maximises social benefits minus social costs (the economic prediction), a “reasonable” action will be one for which the benefits exceed the costs. That is, economic analysis predicts that the county will be found negligent only if the cost of ensuring that the stop sign was re-erected exceeded the benefit of doing so. In this section, I will show that the factors that enter the determination of those costs and benefits are the same as those that the courts usually take into account when determining negligence.

Assume that rural stop signs are frequently knocked down on Saturday evenings. If the relevant counties wait until Monday to replace their stop signs, there will be three accidents every 10 times a sign is knocked down. Hence, there will be $15,000 damages for every 10 such occurrences. ($15,000 = 3 x $5,000.) If the counties replace the stop signs immediately, the number of accidents will fall to one in every 10 occurrences, reducing the accident costs to $5,000, a saving of $10,000. But, in order to obtain that “saving,” counties will have to send out 10 repair crews at an overtime cost of $1,500 each, or $15,000 in total. The $10,000 “saving” will have cost $15,000. Put another way, the average cost of precautions per event (knocked over stop sign) will be $1,500 and the average benefit of those precautions (measured in terms of accident costs saved) will be (2/10) x $5,000, or $1,000. (Note: the reduction in the probability of an accident, when the county sends out a repair crew, is only 2/10 because the crew does not reduce the probability of an accident to zero.) As the economic model predicts that the court will only encourage behaviour whose cost is less than the benefit, the economic prediction is that the court will not find the county to be negligent in this case.

It can be seen from this example that three factors were predicted to enter the court’s calculations:

  • the cost to the defendant of taking an additional precaution to avoid the accident, (here, $1,500);
  • the probability that an additional precaution would have prevented the accident, (here 2/10); and
  • the expected cost of the accident, (here, $5,000).

In the U.S., this prediction was confirmed in one of the leading cases on negligence, U.S. v. Carroll Towing. In that case, Justice Learned Hand concluded that negligence was to be found only if the burden (cost) of precautions was less than the probability of the accident multiplied by the gravity (cost) of the accident – precisely the formulation which was derived from the economic model.

In British/Canadian jurisprudence, confirmation of the prediction is less direct, but persuasive nevertheless – sufficiently persuasive that in recent editions of Canadian Tort Law Allen Linden has organised his discussion of the rules of negligence around the “Learned Hand rule.” In Wagon Mound No. 2, for example, the court concluded that a party could be found negligent even if the probability of an accident was low as long as the cost of the accident was high. Arguably, it was the court’s view that the cost of the accident multiplied by the probability that it could be avoided should be weighed against the cost of avoidance in order to determine negligence – again, precisely the prediction made by economic reasoning. Other leading cases which are consistent with the economic model include Bolton v. Stone, Priestman v. Colangelo, and Reibl v. Hughes.

Conclusion

Economists often define their discipline to be the analysis of “the allocation of scarce resources among competing ends.” When this approach is applied to common law, it suggests that one of the functions of torts might be to establish rules that encourage individuals to use resources effectively. Common law precedents should not discourage relatives from adopting orphans, for example. Nor should they find defendants to be liable if they have taken all precautions for which the benefits (of those precautions) exceed the costs.

In this article, I have argued that this “law and economics” method of analysing the common law predicts that

  • the courts will employ the ex ante approach when resolving tort disputes; and
  • they will base the determination of negligence on: the probability of an accident occuring, the costs of the accident, and the costs of avoiding the accident.

I have also provided evidence that, at least in some cases, the Canadian courts have followed this approach.

I do not wish to conclude from this that the courts should follow the economic approach, nor that they will always adopt it. I merely offer it as another tool for those who are looking for an underlying rationale to the courts’ behaviour. Perhaps in some cases, the advocate and the court will find it of value to think explicitly in terms of the signal which the decision in the current case will send to others in situations similar to those in which the plaintiff and defendant found themselves. In future articles in this series I will discuss the economic analysis of such doctrines as custom, causation, duty of care, volenti, and restitutio in integrum.

Footnotes

* The foregoing analysis is based on an article that I wrote for The Lawyers Weekly (April 24, 1998). This article is also available, as “Duty to Care for Orphaned Minors,” on this website. [back to text of article]

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Christopher Bruce is the President of Economica and a Professor of Economics at the University of Calgary. He is also the author of Assessment of Personal Injury Damages (Butterworths, 2004).

The Effect of Alcoholism on Earning Capacity

by Nicole MacPherson

This article was originally published in the summer 1998 issue of the Expert Witness.

It seems common sense to argue that alcoholics will experience reduced earning capacity. Thus, all else being equal, alcoholics will be eligible for lower damage awards than will other plaintiffs. What is often not clear, however, is how severe the effects of alcoholism will be.

The purpose of this article is to summarise the statistical literature concerning the effects of alcohol consumption on earnings and employment. One of the most important findings of this literature is that alcoholism has both direct and indirect effects on earnings. That is, there is evidence that alcoholics’ earnings are depressed both because alcoholism causes reduced labour productivity and because it discourages investments in “human capital” (e.g., education). Problem drinking is also found to increase unemployment.

Direct Effects

Alcoholism is considered to be a disease, and affects earnings as such. The physical and mental health problems associated with problem drinking have direct effects on labour market productivity and reliability. That is, sickness, hangover, late arrivals, extended lunch breaks, and early departures are some work characteristics that lead to reduced reliability and productivity. This in turn leads to lessened earnings and fewer promotions and raises.

Alcoholism can have other direct effects on wages, namely, alcoholism can affect career choices and stability. It is possible that alcoholics self-select into jobs that are less demanding, and therefore lower paying. The further advanced the state of alcoholism, the less the alcoholic is concerned about his or her career. Therefore, alcoholics tend to gravitate towards jobs that are not strenuous or taxing.

Indirect Effects

An important way in which alcoholism can affect earnings is through its effect on human capital characteristics. If the disease is advanced in youth, the alcoholic may not have the stamina to complete schooling, post-secondary or otherwise. This possible lack of education could lead to lower wages and selection into “dead-end” jobs. It is important to note that alcoholics may select into such jobs because of choice (the direct effect) or because of a lack of education (the indirect effect).

It is likely that alcoholics will have difficulties maintaining employment due to their condition. The reduced reliability discussed above can lead to job losses and decreased employability. The subsequent lack of work experience can lead to lower wages and earnings.

A significant indirect effect arises from familial and relationship problems associated with alcoholism. Alcoholics have higher divorce rates than non-alcoholics. As well, there is a higher probability of an abusive home life among problem drinkers. The emotional and mental strains arising from these factors can be expected to have negative impacts on productivity, and therefore earnings.

Empirical Evidence

Alcoholism’s effect on earnings has been the subject of a number of recent scholarly articles, which attempt to estimate this impact empirically. These studies indicate that, when direct and indirect effects are combined, alcoholics earn approximately 40 percent less than non-alcoholics. When human capital characteristics are controlled for, alcoholism alone leads to an 18 percent reduction in wages. That is, almost one half of the effect of alcoholism on earnings is due to lower human capital characteristics, namely education and work experience. Conversely, this implies that an alcoholic will earn approximately 18 percent less than will others with similar education levels and work histories.

It is significant to note that alcoholics earn less not only because of the effect heavy drinking has on human capital, but also because of the nature of alcoholism. A recent study found that alcoholics are more likely to be unemployed than alcoholics, and earn less when they are employed, even after controlling for the effect of education and experience. As the disease progresses, the earnings potential of the alcoholic lessens.

Alcoholism and employment have a causal relationship. Alcohol abuse negatively affects employment, but lack of work also affects drinking habits. Depression and stress resulting from unemployment can lead to increased reliance on alcohol and other drugs. Alcoholics can enter a vicious circle in that the longer an individual is unemployed, the more advanced the state of alcoholism. As the disease becomes more debilitating, becoming employed is increasingly difficult.

Recent medical research has found that moderate alcohol use leads to health benefits such as reduced risk of cardiovascular disease. Since healthy employees are productive employees, it is not unreasonable to suggest that moderate drinking can lead to greater productivity, and therefore higher earnings. In fact, there is evidence to support the hypothesis that alcohol and earnings have a parabolic relationship. That is, teetotalers and heavy drinkers both earn less than moderate drinkers. In fact, studies show that non-drinkers earn between eight and ten percent less than moderate drinkers. It has been estimated that wages peak for individuals consuming an average of 2.40 drinks per day, which is consistent with the medical literature. Individuals who do not drink at all may miss out on the health benefits of moderate drinking, as well as on social opportunities and networking to further their careers. Conversely, alcoholism deteriorates one’s state of health. As well, alcoholics may endure public shame because of their condition, and this can decrease the opportunities to advance their careers at social functions.

It is vital to realize that a future alcoholic may currently display only minor symptoms of problem drinking. Alcoholism is a disease, and when left untreated can have ravaging effects on the individual’s physical and mental states. These effects can have significant negative impacts on employment, productivity, and earnings.

The lost productivity and lowered earnings of alcoholics are significant costs that have merited recent attention in the economic literature. The alcoholic and his or her family suffers from lowered earnings. Employers and co-workers suffer from the alcoholic’s lost productivity. In addition to the well-known costs of alcoholism, illnesses, automobile accidents, and crime, problem drinking leads to decreased productivity and therefore, lower wages and earnings.

References

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French, M.T., and Zarkin, G.A. “Is moderate alcohol use related to wages? Evidence from four worksites”, Journal of Health Economics, 1995, 14, 319-344.

Hamilton, V., and Hamilton, B. “Alcohol and earnings: Does drinking yield a wage premium?”, Canadian Journal of Economics, 1997, 30 (1), 135-151.

Kenkel, D.S. “Health Behaviour, Health Knowledge, and Schooling”, Journal of Political Economy, 1991, 99 (2), 287-305.

Mullahy, J., and Sindelar, J. “Gender Differences in Labor Market Effects of Alcoholism”, American Economic Review 1991, 81 (Papers and Proceedings), 161-165.

— “Alcoholism, Work, and Income”, Journal of Labor Economics, 1993, 11 (3), 494-520.

— “Employment, unemployment, and problem drinking”, Journal of Health Economics, 1996, 15, 409-434.

Shahaheh, B. “Drug and alcohol abuse in the workplace: Consequences and countermeasures”, International Labour Review, 1985, 124 (2), 207-223.

Zarkin, et. al., “Alcohol use and wages: new results from the National Household Survey on Drug Abuse”, Journal of Health Economics, 1998, 17, 53-58.

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Nicole MacPherson was a Master of Arts student at the University of Calgary. She wrote a thesis on the topic of “Alcohol, Gender, and Labour Market Outcomes.”