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The purpose of this chapter is to outline new methodological developments in business valuation, with particular attention to how those developments are being used in litigation involving lost profits and the value of operating businesses. In addition to methodological developments, the chapter also includes a discussion of recent legal developments, particularly selected cases that affect the use and standards for business valuation techniques within litigation settings. Finally, the chapter includes a mathematical appendix.

The first chapter in the volume, by George A. Barrett and Michael L. Brookshire, is entitled “The Forensic Economics of Medical Monitoring Damages in the United States.” It focuses on a relatively new category of compensatory damages, the measurement of the costs of monitoring the medical condition of a group of designated individuals. These individuals may have alleged that they were adversely affected by the tortuous conduct of certain defendants. Barrett and Brookshire explain the legal parameters, which govern the ways such costs may be measured. They also provide a listing of the relevant cases across different states and in federal courts.

The basic model for estimating economic losses to a company that has some type of business interruption is well-documented in the forensic economics literature. A summary of much of this literature is contained in Gaughan (2000). The general method used to measure damages is essentially the same regardless of whether the loss occurs because of some type of natural disaster (as in insurance claims resulting from flood, fire, or hurricane) or whether it is caused by the actions of another party (as with potential tort claims). The interruption prevents the firm from selling units of product, which would otherwise have been supplied to the market. Economic damage is the loss of revenues less the incremental production costs of the units not sold, plus or minus some adjustment factors described in Gaughan (2000, 2004), and elsewhere.

Punitive damages is a controversial topic in the legal profession and in the field of economics. This chapter explores the economics of punitive damages as they relates to corporate defendants. The economic difference between large corporations and other potential defendants, such as individuals or smaller closely held companies, causes the effects of a punitive award to be different. In some circumstances, these differences raise significant questions as to the appropriateness of punitive damages when imposed on large corporations.

Over the past 15 years or so, a very large proportion of the forensic economics literature has been devoted to research concerning better ways of estimating damages in cases involving personal injury and wrongful death (PI/WD). This is probably not surprising since the largest fraction of consulting income for forensic economists (at least those in the National Association of Forensic Economics, NAFE) comes from such cases.

In the most recent survey of members of the National Association of Forensic Economics (NAFE) (Brookshire, Luthy, & Slesnick, 2003), the authors write that “it is clear that issues related to worklife are at the top of the list” of the members’ preferences for forensic economics research. Worklife-disabled, worklife-self-employed, and worklife-general were ranked #1, #2 and #5 among 20 categories. This chapter addresses two out of these three topics. Worklife of the self-employed is not addressed, and the authors are not aware of any quantitative papers on this point.

This chapter provides a historical overview of the data and methodologies used to measure worklife and the usefulness of such statistics for projecting future retirement behavior. Section 2 discusses the calculation of worklife expectancy (WLE), beginning with a review of the data and method of calculation using what has come to be known as the conventional model. Section 3 looks at the WLE results using the increment–decrement model and subsequent models. Sections 4 and 5 revisit the conventional model and compare the results of the conventional model to the increment-decrement model. Section 6 of the chapter discusses the data and methodologies used to calculate years to final separation (YFS), and Section 7 discusses the use of both WLE and YFS statistics in projecting future retirement behavior.

The recent “reverse”¹ discrimination decisions by the Supreme Court involving the admissions decision-making policies at the University of Michigan² illustrate the underlying need for private and public entities to justify the need to reach or maintain diversity within an organization. Clearly, the equality of the decision-making methodology and criteria used to obtain and maintain diversity was an issue, but perhaps more pressing was the question of whether such programs were necessary. The issue of parity is at the very center of these cases. If the normal admissions process would have resulted in obtaining the predicted number of minority admissions then there may no longer be a need for such programs. While the university cases have been most publicized recently, matters involving affirmative action plans and governmental programs to enhance diversity (such as minority contractor set-asides) face similar questions of parity.