Prejudgment Interest: An Economic Review of Alternative Approaches

February 8, 2016
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There is no consensus in the economic literature as to the appropriate measure of prejudgment interest to apply to damages. In this article, originally published in the Journal of Internatoional Arbitration, Volume 33, Issue 1 at, Tiago Duarte-Silva and Aaron Dolgoff review various proposed alternative methods for determining prejudgment interest rates: the claimant’s ex post or hindsight cost of capital; the claimant’s ex ante or opportunity cost of capital; the respondent’s borrowing rate; and the risk-free interest rate.

Upon examining each method’s economic rationale and merits we conclude that where the objective is full compensation to the claimant the risk-free interest rate is the appropriate measure of prejudgment interest. Our examination of awards in international arbitration shows a prevalence of rates that are not associated with the claimant or the respondent, but rather are consistent with a risk-free rate approach or estimates of what arbitrators deem to be reasonable commercial rates.