Frontier-based incentive mechanisms for allocating common revenues or fixed costs

Qingxian An, Xiangyang Tao, Beibei Xiong and Xiaohong Chen

European Journal of Operational Research, 2022, vol. 302, issue 1, 294-308

Abstract: In practice, allocating common revenues or fixed costs is a common practice in multi-unit organizations to motivate subunits to improve performance. Recently, Dai et al. (2021, EJOR) developed an incentive approach for allocating common revenues or fixed costs. We identify two shortcomings of their approach and propose two frontier-based incentive mechanisms for allocating common revenues or fixed costs. First, the incentive common revenue allocation (ICRA) and incentive fixed cost allocation (IFCA) are conceptualized. On the basis of ICRA and IFCA, the generalized incentive efficiency measures that satisfy strong monotonicity and self-excluded in technology are identified to evaluate subunit performances. To seek for incentive efficiency measures, several ex-post technologies with frontier change rate (FCR) are considered. Different technologies are formulated for the information asymmetry situation, in which FCR is not available to subunits when they select production mixes, and the information symmetry situation, in which FCR is available to subunits when they select production mixes. We elucidate that the formulated technologies are applicable to derive corresponding incentive efficiency measures. ICRA and IFCA are then obtained via the concept of efficiency proportion. Subsequently, the mechanisms for information asymmetry situation and information symmetry situation are summarized, and several theorems and interesting observations of the proposed mechanisms are reported. Finally, we illustrate our proposed mechanisms for allocating common revenues or fixed costs using data from a home appliance enterprise in China.

Keywords: Data envelopment analysis; Incentives; Performance improvement; Information asymmetry; Revenue allocation; Fixed cost allocation (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:302:y:2022:i:1:p:294-308

DOI: 10.1016/j.ejor.2021.12.039

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