Scandinavian Working Papers in Economics

Discussion Papers of Business and Economics,
University of Southern Denmark, Department of Business and Economics

No 12/2013: Cost Sharing in Chains and Other Fixed Trees

Jens Leth Hougaard (), Mich Tvede () and Lars Peter Østerdal ()
Additional contact information
Jens Leth Hougaard: Department of Food and Resource Economics, Postal: University of Copenhagen, Rolighedsvej 25, DK-1958 Frederiksberg C, Denmark
Mich Tvede: Newcastle University, Postal: United Kingdom
Lars Peter Østerdal: Department of Business and Economics, Postal: University of Southern Denmark, Campusvej 55, DK-5230 Odense M, Denmark

Abstract: We consider a cost sharing problem among agents on a line. The problem is closely related to the classic airport game, but in our model agents are characterized by their location, rather than their needed runway length. We characterize a family of cost allocation rules in which agents pay a share of the incremental costs as well as any debt from upstream agents, with the Bird rule (where agents pay their full incremental cost) and the ‘free rider’ rule (where the terminal agent pays everything) as the two extreme cases. We also extend the analysis to cost sharing among agents located on a fixed tree structure.

Keywords: Airport game; cost allocation; axiomatic characterization; Bird Rule; Incremental cost sharing

JEL-codes: C71; D63

15 pages, September 5, 2013

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