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The Value of Future Earnings in Perfect Foresight Equilibrium

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  • Scott Dale Gilbert

Abstract

The present work considers the problem of valuing a future income stream in a perfect foresight economy. In this setting, with competitive equilibrium in labor and asset markets, market valuation of labor-generated income streams can be very simple. However, it can also be undone by moral hazard, in which case valuation may be based instead on fair compensation. I show that perfect foresight valuation emerges somewhat imperfectly in the forensic economics literature. To apply this type of valuation, the economist must form an expectation E[P] about perfect foresight price P. I consider several models of this expectation, some of which yield standard present value equations. I find that, while standard equations “fit” historical data well in some respects, they miss some dynamics that are better captured by more advanced econometric methods.

Suggested Citation

  • Scott Dale Gilbert, 2011. "The Value of Future Earnings in Perfect Foresight Equilibrium," Journal of Forensic Economics, National Association of Forensic Economics, vol. 22(1), pages 21-41, June.
    • Handle: RePEc:fek:papers:doi:10.5085/jfe.22.1.21
    DOI: 10.5085/jfe.22.1.21
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    Cited by:

    1. Sobieralski, Joseph B., 2013. "The cost of general aviation accidents in the United States," Transportation Research Part A: Policy and Practice, Elsevier, vol. 47(C), pages 19-27.

    More about this item

    JEL classification:

    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics

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