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Efficient Cost Allocation

Author

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  • Korok Ray

    (George Washington School of Business, Washington, DC 20052)

  • Maris Goldmanis

    (Department of Economics, Royal Holloway, University of London, London, United Kingdom)

Abstract

Firms routinely allocate the costs of common corporate resources down to divisions. The main insight of this paper is that any efficient allocation rule must reflect the firm's underlying cost structure. We propose a new allocation rule (the polynomial rule), which achieves efficiency and approximate budget balance. Welfare losses due to linear allocation rules increase with firm size, so polynomial allocation rules dominate linear rules for larger firms. This paper was accepted by Mary E. Barth, accounting.

Suggested Citation

  • Korok Ray & Maris Goldmanis, 2012. "Efficient Cost Allocation," Management Science, INFORMS, vol. 58(7), pages 1341-1356, July.
    • Handle: RePEc:inm:ormnsc:v:58:y:2012:i:7:p:1341-1356
    DOI: 10.1287/mnsc.1110.1486
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    References listed on IDEAS

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    Cited by:

    1. Chen, Yenming J. & Chen, Tsung-Hui, 2019. "Fair sharing and eco-efficiency in green responsibility and green marketing policy," International Journal of Production Economics, Elsevier, vol. 217(C), pages 232-245.
    2. Jacob P. Gramlich & Korok Ray, 2015. "Reconciling Full-Cost and Marginal-Cost Pricing," Finance and Economics Discussion Series 2015-72, Board of Governors of the Federal Reserve System (U.S.).

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