DEVELOPMENT OF HYBRID COST FUNCTIONS FROM ENGINEERING AND STATISTICAL TECHNIQUES: THE CASE OF RAIL. FINAL REPORT NO. 1

Meaningful economic analysis of public policy and resource allocation in the transportation industries requires empirical understanding of costs. Two traditional methods of acquiring such knowledge are engineering techniques based on detailed models of operations, and statistical analysis based on expenditure and output records of firms. The objective of the research is to develop a method for combining these approaches, in order to provide accurate, meaningful models of a cost function for a railroad. The resulting hybrid cost function incorporates detailed information on both operations and non-operations activities so as to provide a more complete picture of the relation of costs to outputs produced and inputs purchased and used by the rail firm. Thus hybrid models reflect costs associated with yard and linehaul activity as well as marketing, planning and other non-operations elements of the firm. This links together management, train crews, yard activity, maintenance, financial considerations, etc. as elements of cost generation in the firm. A general methodology for integrating engineering and economic approaches to cost analysis is developed and applied to data collected from a rail firm. A multi-output, short-run variable cost function is estimated and examined.