Econometrica: Jul, 1985, Volume 53, Issue 4

Producer Incentives in Cost Allocation

https://doi.org/0012-9682(198507)53:4<757:PIICA>2.0.CO;2-2
p. 757-766

H. P. Young

A general problem faced by both private firms and public enterprises is how to allocate the costs of common facilities fairly among the different goods and services produced. Any such cost accounting method can create incentives among product managers within the firm for altering the production function to their advantage. It is therefore both reasonable and desirable that a method reward increased efficientl by attributing lower unit costs to products whose marginal cost of production uniformly decreases. It is shown that there is only one "symmetric" method that satisfies this "monotonicity" principle--namely, the Aumann-Shapley price mechanism based on the Aumann-Shapley value for nonatomic games. This provides a new and simple axiomatization of this method without resorting to the usual assumption of additivity.