Efficient Cost Allocation
39 Pages Posted: 1 Mar 2007
Date Written: February 22, 2007
Abstract
Firms routinely allocate the costs of common corporate resources down to divisions. This paper explores cost allocation rules that induce efficient capital investments by these divisions. It examines efficient allocation rules that satisfy properties of actual rules used in practice, namely budget balance, fairness, and simplicity. The main idea is that any efficient allocation rule must reflect the firm's underlying costs. I explore the efficiency of linear allocation rules, and examine when nonlinear, simple allocation rules induce efficient investment. Finally, I propose a new allocation rule that achieves efficiency and approximates budget balance, and is feasible even when the firm does not know its cost function exactly but must estimate it from internal cost data.
Keywords: Cost allocation, Free-rider problem, mechanism design
JEL Classification: M40, M46, G31
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
By Dirk Bergemann and Stephen Morris
-
By Dirk Bergemann and Stephen Morris
-
Robust Mechanism Design: An Introduction
By Dirk Bergemann and Stephen Morris
-
By Michael Ostrovsky, Michael Schwarz, ...
-
By Benjamin G. Edelman, Michael Ostrovsky, ...
-
Robust Implementation: The Role of Large Type Spaces
By Dirk Bergemann and Stephen Morris
-
By Ehud Kalai
-
By Dirk Bergemann and Stephen Morris
-
Efficient Auction Mechanisms with Interdependent Valuations and Multidimensional Signals
-
On Equilibrium in Pure Strategies in Games with Many Players