COMMON COSTS AND CROSS‐SUBSIDIES: MISESTIMATION VERSUS MISALLOCATION

Mark L. Burton, David L. Kaserman and John Mayo

Contemporary Economic Policy, 2009, vol. 27, issue 2, 193-199

Abstract: Existing models of cross‐subsidization have focused on either ex ante distortions to investments or misallocations of common costs as the principal sources of cross‐subsidies in regulated firms. In this paper, we identify a third vehicle for such cross‐subsidization that, given regulators’ preferences, is not only likely but likely to be prominent; namely, the misestimation of the magnitude of common costs. Because our results incorporate regulators’ preferences, they may provide the necessary building block for a positive theory of the magnitude of observed common costs that has, heretofore, been absent in the literature. (JEL L51, L97)

Date: 2009
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