The Offset Rule: Some Multinational Evidence

The offset rule is a method to simplify the calculation of lump sum damage awards to compensate victims for an expected lost future flow of income. If the expected nominal rate of interest is roughly equal to the expected rate of growth in nominal wages (assuming the loss is due to lost labour income), then the present discounted value of the loss is shown to be easily computed as just the amount of the loss in the first year multiplied by the number of years over which the loss is expected to occur. We test the assumptions of the offset rule for eleven different countries. For each country, we cannot reject the hypothesis that the assumptions of the offset rule are satisfied. The relevant implication of this work is that the offset rule can provide a starting point for the assessment of damages. While there are undoubtedly good arguments for personalizing awards, there is no longer any good reason to debate the size of the real rate of interest, the expected rate of inflation, or average changes in labour productivity. These variables cancel each other out in the offset rule.