Efficient Cost Allocation

Korok Ray () and Maris Goldmanis ()
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Korok Ray: George Washington School of Business, Washington, DC 20052
Maris Goldmanis: Department of Economics, Royal Holloway, University of London, London, United Kingdom

Management Science, 2012, vol. 58, issue 7, 1341-1356

Abstract: Firms routinely allocate the costs of common corporate resources down to divisions. The main insight of this paper is that any efficient allocation rule must reflect the firm's underlying cost structure. We propose a new allocation rule (the polynomial rule), which achieves efficiency and approximate budget balance. Welfare losses due to linear allocation rules increase with firm size, so polynomial allocation rules dominate linear rules for larger firms. This paper was accepted by Mary E. Barth, accounting.

Keywords: cost allocation; cost sharing; mechanism design; teams; efficiency (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:58:y:2012:i:7:p:1341-1356

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