The estimation of economic damages: a proposed methodological framework

The aim of this paper is to propose a standard and general methodological framework based upon economic and business administration theories on economic damages quantification. Our objective is to contribute toward defining a new technical standard for the valuation of economic damages since this issue, to date, despite its theoretical and practical importance, remains little explored in both literature and professional practice. Our focus on economic damages stems from the circumstance that, although such damages can be attribitable to a vast range of different harmful events (i.e. all events capable of determining, even potentially, a decrease and/or non-increase in asset value), they are characterized by specific features allowing for the definition of general criteria for identifying recurring sub-components of damages; this decomposition of economic damages forms the basis of our proposed valuation methodology. In light of the foregoing, we first examine the notion and the nature of the typical components of economic damages, which are consequential damages, loss of profits, loss of chances and damages to commercial reputation. Afterwards, we develop our analyses on the basis of a general definition allowing for the extent of financial loss to be determined as the difference between, on the one hand, what the damaged assets were, what they would have become and what they could have become if the harmful events had not occurred, and, on the other, what the damaged assets are, what they will become and what they could become in reality after the occurrence of harmful events. Once we have identified a set of valuation principles and the value configurations to be considered for the estimate, we propose a specific valuation approach for each component of the economic damages. In a nutshell, the consequential damages are to be determined as the sum between the (additional) historical incurred costs and the (additional) minimum costs which cannot be avoided in the future resulting from the damages suffered. The loss of profits and the loss of chances can be determined jointly as the difference between the estimated asset value in the hypothetic ex ante scenario where no damages have occurred and the asset value in the actual ex post scenario taking into account the adverse effects of the damages incurred; for both scenarios, a possible valuation method based on the discounted cash flow model is proposed. Our contribution to the existing literature is the investigation of both the theoretical and practical aspects of economic damages valuation and the proposal of a general valuation approach for each of the main components of economic damages. Future studies may be conducted in order to make further progress toward defining a technical framework on the principles, methodological approaches and practical guidelines for the estimation of economic damages.