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Forensic Economics in International Cases Presentation to the Dade County Defense Bar Association July 18, 2007 Manuel Lasaga Ph.D. StratInfo Miami, Fl Introduction An economist is an economic expert not an attorney. Advice the

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Forensic Economics in International Cases

Presentation to the Dade County Defense Bar Association July 18, 2007 Manuel Lasaga Ph.D. StratInfo Miami, Fl

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Manuel Lasaga Ph.D. www.StratInfo.com 2 Manuel Lasaga Ph.D. www.StratInfo.com 2

Introduction

  • An economist is an economic expert not an attorney.

– Advice the economist on the legal rules affecting calculation of damages.

  • Calculation of economic losses is a multi-step process.
  • Basic model for calculation of economic losses in the

case of:

– Personal Injury & Wrongful Death (PI&WD) – Commercial Losses

  • Application of basic model to international cases.
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Manuel Lasaga Ph.D. www.StratInfo.com 3

Personal Injury and Wrongful Death (PI&WD)

Generic Model:

Incomei represents the loss of income. This estimate includes among other things the following calculations based on available information:

  • Base salary & growth of salary (for PI need income before & after)
  • Benefits
  • May include adjustments for survival and employment probabilities
  • Less taxes
  • Less personal consumption (in case of wrongful death)
  • “n” is the period of loss

NOTE: Because this is a simple version of the model used for illustration purposes, it may exclude other variables. The discount rate “i” should be a risk-free rate

PV Income i Income i Income i

n n n

= + + + + + +

1 1 2 2 2

1 1 1 ( ) ( ) ... ( )

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Manuel Lasaga Ph.D. www.StratInfo.com 4

Commercial Losses

Generic Model:

CFi represents the cash flow loss to the business. For valuations, CFn would be substituted with the terminal / residual value. This estimate includes among other things the following calculations based on available information (see Note in previous slide):

  • Revenues / sales (cost of goods sold) & growth
  • Administrative costs
  • Less taxes
  • Add back non cash-flow expenses (i.e. depreciation)
  • Add changes in long-term debt
  • Subtract actual capital expenditures and change in working capital
  • n is the period of loss

In this case the discount rate “ke” is the cost of equity which should be adjusted for risk. Other discount rates could apply depending on definition of CF.

PV CF k CF k CF k

e e n en n

= + + + + + +

1 1 2 2 2

1 1 1 ( ) ( ) ... ( )

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Manuel Lasaga Ph.D. www.StratInfo.com 5

Steps in Calculating Economic Damages

Establish Methodology: PV Model Identify key input factors & assumptions: Macro & Micro economic factors Quantitative & Qualitative Information Generate projection of losses and discount to PV Assess sensitivity

  • f estimates to

key factors

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The Time Line of Economic Losses

Date of Loss Event Date of Analysis End Date For Losses Today T T – x years T + n years 2003 2007 2025 Some Information Is based on Actual values All information needs to be projected

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Economic Losses from an international perspective

  • This presentation will focus on cases involving PI&WD.
  • Importance of cross-country issues.
  • The process for calculating economic damages in the

international context:

– Determining the input factors / assumptions – Generating the output from the model – Sensitivity of PV to determining variables

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Economist Should Address Specific Country Issues

  • The methodology based on the PV model is the same for

every country, but is applied to each country differently.

– Each country has its own unique characteristics. – Developed versus Emerging Markets. – Different economic structures: currencies, markets, institutions, culture, demographics, etc. – Availability of information differs widely across countries.

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  • Estimation of economic losses in international cases

involves the following country specific process:

– Use of relevant information – Consistency of analysis – Reasonableness of assumptions – Appropriate use of the model – Generated output makes economic sense in the country context.

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Analysis of Input Factors:

  • I. Macro / Economy-wide Variables

The following input variables may be useful if available: Inflation

  • CPI, PPI

Interest Rates

  • Short- and long-term rates
  • Nominal and real interest rates

Exchange Rates

  • Use the spot rate or forecast the exchange rate?

Economic Growth (GDP)

  • Importance of informal economy

Industry Growth Income Growth

  • Personal income, wages, etc.

Taxes

Manuel Lasaga Ph.D. www.StratInfo.com 10

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Sources of information for Macro Variables: – Country sources include:

1. Central Bank 2. National Statistical Institute 3. Ministry of Finance

– International sources include:

1. IMF 2. World Bank 3. UN / OECD

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Forecasting the Macro variables: – Projections based on past values

1. Use of past values depends on length of economic cycle. Rely on experience over long periods that are representative of the economic/business cycle. 2. Analyze growth rates and historical volatility.

– Take into account reasonable relationships between variables.

For example, GDP measures total output in the economy; thus it has a direct impact on the output of a particular industry, which in turn has a direct impact on the output of a particular business within that industry, which in turn has a direct impact on the growth of income of a person working in that particular business.

– Compare to forecasts produced by others such as IMF, World Bank, Consensus Economics.

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  • II. Micro / Individual Variables

The following input variables may be useful if available: Life Expectancy Level of Income prior to loss & projected Income growth

1. Nominal growth; or 2. Real growth (inflation adjusted) 3. Growth rate is dependent on individual’s past performance as well as industry and economy-wide characteristics. 4. When available, refer to statistics on earnings in that industry. Information

  • n comparable occupations may also be useful.

– Note: for PI you need to project the level of income that the individual would have earned if the loss had not occurred and the income after the loss; the economic loss is the difference between the two.

Value of services Personal consumption (WD) Life care plan (PI)

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Sensitivity of PV (output) to Input Values

$221,785 If no offset in Disc rate Memorandum:

  • 17.0%
  • 16.0%
  • 15.7%

% change versus Base $186,658 $189,007 $189,732 $225,000 Present Value of Losses 21.0% 19.0% 19.0% 19.00% Discount Rate (after Tax) 20.5% 18.5% 20.5% 20.5% Income Growth (nominal) 17.5% 17.5% 15.5% 17.5% Inflation Disc rate Growth Inflation Base case Higher Lower Lower FX rate: Bs2,147/US$ Projection period 20 years Sensitivity to Assumptions: Hypothetical Venezuelan Case

Note: these are all hypothetical values used for illustrative purposes only.