Mayo, Burton and Kaserman publish paper in Contemporary Economic Policy
Date: August 21, 2008
Abstract: Existing models of cross-subsidization have focused on either ex ante distortions to investments or misallocations of common costs as the principal sources of cross-subsidies in regulated firms. In this paper, we identify a third vehicle for such cross-subsidization that, given regulators' preferences, is not only likely but likely to be prominent; namely, the misestimation of the magnitutde of common costs. Because our results incorporate regulators' preferences, they may provide the necessary building block for a positive theory of the magnitude of observed common costs that has, heretofore, been absent in the literature.
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