Cost Allocation Games

By Joel S. Demski
1981| Working Paper No. 590

Considerable recent literature uses game theory techniques to enhance our understanding of cost allocation. These studies typically begin with a setting in which allocation is required and then derive or suggest properties that the required allocation ought to possess. A more primitive approach is followed here, where a model in which a cost allocation mechanism has nontrivial economic value is explored. This allows us to associate the allocation mechanism with the precise use to which the allocations are to be put. In turn, a link to game theory is demonstrated in which an economically valuable allocation mechanism is defined by the solution to a particular cost allocation game.