Contracts, cost sharing and consistency

No 09-04, CeNDEF Working Papers from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance

Abstract: Under a contract, agents are not only held to honor the allocation as prescribed by a cost sharing mechanism but also a full description of allocated units and costs once production falls short. For agents leaving the cost sharing problem by taking their demanded units and prepaying the corresponding bill, a contract allows for a reformulation of the cost sharing problem to serve the remaining agents. Consistency requires invariance of cost shares relative to any such reduced cost sharing problem. Under consistency, the proportional mechanisms uniquely satisfy additivity and positivity of cost shares. Exchanging positivity by equal treatment characterizes the set of mechanisms which propose proportional shares for only those agents in the maximal indifference set for some preordering on the rest of nonnegative numbers. This includes egalitarian and average cost sharing. The latter is further characterized by the properties linearity. Under R-consistency, a mechanism is supported by at least one reasonable contract, which meets upperbounds. The class of additive and R-consistent mechanisms is isomorphic to the class of consistent and monotonic rationing methods. Consequently serial cost sharing is R-consistent, whereas Shapley-Shubik is not. Examples are given how the extensive literature on consistent monotonic rationing can be inferred to study and characterize cost sharing mechanisms.

Date: 2009
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