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COMMON COSTS AND CROSS‐SUBSIDIES: MISESTIMATION VERSUS MISALLOCATION
Author(s) -
BURTON MARK L.,
KASERMAN DAVID L.,
MAYO JOHN W.
Publication year - 2009
Publication title -
contemporary economic policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.454
H-Index - 49
eISSN - 1465-7287
pISSN - 1074-3529
DOI - 10.1111/j.1465-7287.2008.00116.x
Subject(s) - subsidy , ex ante , economics , deadweight loss , microeconomics , welfare , macroeconomics , market economy
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 )