Proving Causation in Damages Analyses

Wed May 30 11:28:14 EDT 2007
Dr. Lauren Stiroh

Once a defendant has been accused of engaging in some unlawful act -- securities fraud, a breach of contract, or participation in a price-fixing conspiracy -- there will come a time when an economist will be asked to compute the amount of damages that should be awarded to the plaintiff should liability be proven. Assessing damages is a complex undertaking because in many cases, the legal standard requires an estimate of the injury that would not have happened but for the unlawful act: that is, the assessed injury must have been caused by the unlawful acts.

In this chapter from Economics of Antitrust: Complex Issues In a Dynamic Economy, NERA Senior Vice President Dr. Lauren Stiroh describes the challenges in determining the damages that can be causally connected to the unlawful act that led to them. Although econometric and other statistical methods are often used to isolate the impact of the unlawful act from other events in the marketplace, an empirical correlation between the "bad act" and the calculated damages does not imply causation. Conclusions regarding causality must therefore be based on economic theory or some a priori chain of reasoning capable of explaining why and how the cause led to the effect.