Common Costs and Cross-Subsidies: Misestimation Versus Misallocation

Contemporary Economic Policy, Vol. 27, Issue 2, pp. 193-199, April 2009

7 Pages Posted: 16 Jun 2009

See all articles by Mark L. Burton

Mark L. Burton

Marshall University

David L. Kaserman

Auburn University - Department of Economics

John W. Mayo

Georgetown University - Department of Strategy/Economics/Ethics/Public Policy

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)

Suggested Citation

Burton, Mark L. and Kaserman, David L. and Mayo, John W., Common Costs and Cross-Subsidies: Misestimation Versus Misallocation. Contemporary Economic Policy, Vol. 27, Issue 2, pp. 193-199, April 2009, Available at SSRN: https://ssrn.com/abstract=1394052 or http://dx.doi.org/10.1111/j.1465-7287.2008.00116.x

Mark L. Burton (Contact Author)

Marshall University ( email )

Huntington, WV 25755-2300
United States

David L. Kaserman

Auburn University - Department of Economics

415 W. Magnolia
Auburn, AL 36849-5242
United States
(334) 844-2905 (Phone)
(334) 844-4615 (Fax)

John W. Mayo

Georgetown University - Department of Strategy/Economics/Ethics/Public Policy ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-6972 (Phone)
(202) 687-7310 (Fax)

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