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A New Approach to Railroad Cost Estimation

  • 01
  • Jan
  • 1978
AUTHOR: Andrew F. Daughety, Mark A. Turnquist, Ronald R. Braeutigam
OFFICE: RPD
REPORT NUMBER: DOT-OS-70061
SUBJECT: Evaluation
KEYWORDS: Service Quality, Ride Quality, Economic Analysis, Econometric Estimation Process
ABSTRACT: Cost functions for railroad firms are an important element of management decision-making. They are also a principal basis for regulatory policy. Standard ICC cost-finding procedures which are based on a number of untenable assumptions regarding, the allocation of common and joint costs, are inadequate. Furthermore, traditional econometric attempts at rail cost estimation generally have suffered from extensive aggregation of firms, insufficient disaggregation of output, and inadequate representation of the physical process of producing services. This paper presents the results of estimating a rail cost function using a new technique based on incorporation of engineering models of the production process into the econometric estimation process. The data base is a time series comprising nine years of monthly data from a single railroad, including detailed information on both operations and financial transactions. The major contribution of this work is the explicit incorporation of engineering performance models in the analysis. This allows the inclusion of a measure of service quality, average speed of shipment, as a characteristic of the firm's output. This inclusion provides a significant first step in allowing management to better understand the cost implications of improving service quality. The basic structure developed in this paper is flexible enough to allow other measures of service quality, such as trip time reliability and loss-and-damage, to be included.
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