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COMMON COSTS AND CROSS-SUBSIDIES: MISESTIMATION VERSUS MISALLOCATION |
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| Authors: | MARK L BURTON DAVID L KASERMAN and JOHN W MAYO |
| Institution: | Mayo:;Professor of Economics, Business and Public Policy McDonough School of Business, Georgetown University, Washington, DC 20057. Phone (202) 687-6972, Fax (202) 687-4012, E-mail: . Burton:;Research Associate Professor, Department of Economics, University of Tennessee, Knoxville, TN 37996. Phone (865) 974-4358, Fax (865) 974-4601, E-mail: . Kaserman:;Department of Economics, Auburn University, Auburn, AL 36849. (deceased). |
| 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 ) |
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