COST-SHARING CLUBS AND THE PRIVATE PROVISION OF TRANSPORTATION INFRASTRUCTURE (COOPERATIVE GAME, CROSS-SUBSIDIZATION, RAILROADS)

This research concerns procedures governing internal pricing decisions by the owners and users of a collectively provided facility, specifically a jointly owned terminal railroad in the St. Louis area. Evidence is presented which demonstrates that allocative efficiency is affected adversely by the selection of an inappropriate cost-sharing procedure. It is documented that current internal prices regarding cost-sharing have led to a situation whereby some owning railroads subsidize the operations of other railroads. As a consequence, an offer of government-subsidized investment in the local railroad network was rejected, which on the surface represents puzzling behavior on the part of profit seeking firms.;Important empirical results are that the core of the game is non-empty, which means that fair cost-shares do exist, and that the currently utilized cost-sharing procedure--a "proportionate use" scheme--is not an element of the core. Cost-shares calculated using the Shapley value are contained in the core, which means that cost-sharing procedures based on Shapley cost-shares would provide incentives for better patterns of investment in and utilization of jointly used rail facilities. It is also possible to identify those railroads which are mistreated by the cost-sharing procedure actually used. This identification provides the basis for explaining observed trends in railroad operations and organization.;The formal joint-cost-allocation problem of finding an efficient and equitable set of internal prices is represented in terms of cooperative game theory. The core of the game is associated with properties of group stability and fairness. Actual and potential alternative cost-sharing procedures are represented as solutions to this game.