Deposing an Econometrics Expert

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# Deposing an Econometrics Expert - PowerPoint PPT Presentation

Deposing an Econometrics Expert. Presentation to Boston Bar Association Business Litigation Committee by Roy J. Epstein, PhD Expert economic analysis for complex litigation Adjunct Professor of Finance, Boston College April 9, 2008. What is Econometrics?.

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### Deposing an Econometrics Expert

Presentation to

Boston Bar Association Business Litigation Committee

by

Roy J. Epstein, PhD

Expert economic analysis for complex litigation

Adjunct Professor of Finance, Boston College

April 9, 2008

What is Econometrics?
• Combines economic theory, data, and statistical methods
• Mainstream tool in legal proceedings
• Generates formulas to show causation (liability) and to estimate damages
• E.g., did release of a pollutant lower property values and, if so, by how much
Most Common Econometric Model—Linear Regression
• Predicts “dependent” variable in terms of one or more “explanatory” variables, e.g.:

Crop Yield = 5*Rain + 2*Fertilizer

• Coefficients of 5 and 2 “best fit” the rain and fertilizer data to crop yield
• Sorts out individual effects of multiple causal factors, e.g.,:
• 5 bushels per additional inch of rain
• 2 bushels per additional ton of fertilizer
Principal Outputs from Linear Regression
• Estimated value of each coefficient in the regression equation
• Test of “statistical significance” of each estimated coefficient
• Not significant means a coefficient is statistically indistinguishable from zero, regardless of value actually obtained
Clash of Models
• For same alleged conduct and facts:
• Expert for one side typically finds large and statistically significant coefficients
• Expert for other side typically finds small and/or statistically insignificant effects
How Econometric Experts Reach Opposite Conclusions
• Different results usually due to combination of:
• Using different explanatory variables
• Using different data
• Using different statistical procedures
• Deposition must explore each area
If You Could Ask Only a Single Question at the Deposition
• “What did you do to establish the reliability of your results?”
Deposition Step 1—Discovery
• Opposing expert’s backup materials
• Raw data and/or identification of exact sources
• Details of all data manipulations
• All regression runs, graphs, and other data analyses considered
• Opposing expert’s results usually sensitive to assumptions involving choice of variables, data, and estimation procedures
• Identify key assumptions
• Know effect of adopting alternative assumptions
• Questions should probe basis for opposing expert’s choices

### Deposition Step 3—General Topics to Cover

Estimated Coefficients
• Algebraic sign
• Effect of explanatory variable in “right” direction?
• Magnitude
• Implausibly large or small?
• Statistical significance
• Did expert use 95% confidence interval?
Variables
• Selection of explanatory variables
• How many different models were estimated? How were they different? Did any yield contrary results?
• What did expert do to establish chosen model was more reliable than alternatives considered?
Data
• Reliability of data sources
• Procedures used to construct data
• Rationale for grouping of transactions (transaction, plaintiff, all customers, product, industry)
• Rationale for time period chosen
• Checks/controls for outliers (atypical data points)
Estimation Procedures
• Ordinary Least Squares (“OLS”) most widely used procedure but inappropriate in certain situations
• Adjustments may be needed for reliable coefficient estimates
• Tests exist to assess whether alternative procedures should be used
• Did the expert use them?

### 1) General Use of Regression: Ivy League Financial Aid Antitrust Litigation

Assessing Market Impact of Alleged Conduct
• DOJ sued MIT and Ivy League schools for colluding on financial aid awards
• Key issue: did challenged practices have anticompetitive effect?
• MIT used econometric model to analyze prices charged by national sample of schools
• No evidence that alleged conduct raised prices
The Model
• Dependent variable: average price (tuition + room and board) by school
• 14 explanatory variables to account for different school characteristics
• No price effect of alleged collusion:
• Controlling for other factors, MIT and Ivys charged \$322 less than other schools
• But effect not statistically significant, therefore indistinguishable from zero

### 2) Assumptions about Explanatory Variables: Estimating Profits in a Damages Claim

[a case last year in which Dr. Epstein was involved]

Different Models for Profit Analysis
• Defendant produced two products, A and B
• Defendant: overhead expenses caused by total sales (1 explanatory variable)
• Plaintiff: separate effects on overhead from products A and B (2 explanatory variables)
Importance of Choice of Explanatory Variables
• Defendant: each \$1 increase in total sales adds \$0.40 in overhead (and statistically significant)
• Plaintiff: sales of B have no statistically significant effect on overhead
• Profitability of product B:
• Zero under defendant theory
• Substantial under plaintiff theory

### 3) Data Reliability (or Lack Thereof): the Conwood Case

Conwood v. US Tobacco
• Plaintiff analysis relies on extreme data outlier
• \$1 billion claimed damages, after trebling
• Sustained after review by Supreme Court

### Informative Legal Decisions

Selected Cases that Discuss Quality of Econometric Evidence
• Freeland v. AT&T Corp., 238 F.R.D. 130 (S.D.N.Y. 2006)
• Issues: omitted explanatory variables, misuse of average prices
• In Re Methionine Antitrust Litigation (West Bend Elevator, Inc. v. Rhone-Poulenc), 2003 U.S. Dist. LEXIS 14828 (N.D. Cal., August 26, 2003)
• Issues: omitted explanatory variables, irrelevant data, improper/insufficient time period, improper estimation procedure
• Johnson Electric v. Mabuchi Motor America, 103 F. Supp. 2d 268 (S.D.N.Y 2000)
• Issues: unreliable data, implausible magnitudes of coefficients
Summary
• Most econometric models sensitive to one or more assumptions regarding:
• Choice of explanatory variables
• Appropriate data
• Estimation procedure
• Regression results not reliable until sensitivities identified and explained
• Deposition must address basis for opposing expert’s assumptions
For Further Information…

Roy J. Epstein, PhD

Expert economic analysis for complex litigation

1280 Massachusetts Ave., 2nd Fl.

Cambridge, MA 02138

rje@royepstein.com

(617) 489-3818

Adjunct Professor of Finance, Boston College