Allocation of Recurring Fixed Costs According to Partners’ Varying Revenues in Professional Services

We consider professional service providers, such as lawyers and physicians, who essentially work independently, but share an office or clinic. They need to jointly cover recurring fixed costs, like rent and staff wages, in every period. It is often argued that such costs should be allocated based on usage of the facilities. A more quantifiable indirect indicator of usage is the revenues. As partners’ revenues fluctuate over time, it is plausible to require, as we do in this study, that their shares in the fixed costs fluctuate accordingly. Had partners’ revenues not fluctuated, the deterministic cost allocation problem would be mathematically equivalent to the bankruptcy problem. Ours is a dynamic stochastic model of cost allocation for which we examine some ex-ante mechanisms based on partners’ portions of total revenue. Monotonicity, proportionality, and other properties of the suggested mechanisms are studied.