Should Tobacco Companies Pay the Present Value of Damages?

Abstract

The concept of present value is a standard and uncontroversial staple of business economists. While there may be some legitimate debate over the choice of interest rate to be used in any application, the idea of present value is not seriously in debate. It may come as a surprise, therefore, to learn that the use of present value calculations in legal settings is not routinely accepted. We examine this difference of opinion in the context of a major case study in which huge amounts of money hinged on the willingness of the courts to allow present value calculations. This case is the calculation of damages in the lawsuits brought by state attorney generals against tobacco companies. From the perspective of damages experts retained by the plaintiffs in many of these cases, we found ourselves convincing lawyers and judges of the need to use present value calculations. Given the long time horizon over which damages occurred, for example back to 1957 in the Oklahoma case, the use of present value could be expected to make a significant difference to the overall damages amounts. Indeed, we show that it does. For the state of Oklahoma, un-discounted excess medical expenditures due to smoking are $1.395 billion during the forty-year period since 1957. When an appropriate risk-adjusted rate is applied, the present value of those damages nearly triples to $4.011 billion. This is a significant difference in damages, by virtually any metric.