Sharing the cost of risky projects

Hougaard, J. L. and Moulin, H. (2018) Sharing the cost of risky projects. Economic Theory, 65(3), pp. 663-679. (doi: 10.1007/s00199-017-1034-3)

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Users share the cost of unreliable non-rival projects (items). For instance, industry partners pay today for R&D that may or may not deliver a cure to some viruses, agents pay for the edges of a network that will cover their connectivity needs, but the edges may fail, etc. Each user has a binary inelastic need that is served if and only if certain subsets of items are actually functioning. We ask how should the cost be divided when individual needs are heterogenous. We impose three powerful separability properties: Independence of Timing ensures that the cost shares computed ex ante are the expectation, over the random realization of the projects, of shares computed ex post. Cost Additivity together with Separability Across Projects ensure that the cost shares of an item depend only upon the service provided by that item for a given realization of all other items. Combining these with fair bounds on the liability of agents with more or less flexible needs, and of agents for whom an item is either indispensable or useless, we characterize two rules: the Ex Post Service rule is the expectation of the equal division of costs between the agents who end up served; the Needs Priority rule splits the cost first between those agents for whom an item is critical ex post, or if there are no such agents between those who end up being served.

Item Type:Articles
Glasgow Author(s) Enlighten ID:Moulin, Professor Herve
Authors: Hougaard, J. L., and Moulin, H.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Economic Theory
ISSN (Online):1432-0479
Published Online:25 January 2017
Copyright Holders:Copyright © 2017 Springer-Verlag Berlin Heidelberg
First Published:First published in Economic Theory 65(3):663-679
Publisher Policy:Reproduced in accordance with the copyright policy of the publisher

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