Business Case Studies & Business Publications

The Elevator Saga

Baucells, Manel, Y...

Case

The Elevator Saga

Baucells, Manel; Yemen, Gerry

QA-0866 | Published April 27, 2017 | 6 pages Case

Collection: Darden School of Business

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This case describes a common situation in old buildings, namely the decision as to whether intall an elevator. In this armchair case, we have an apartment building in Budapest with 3 towers, each containing 24 homeowners, with a possible interest in adding an elevator to each tower of the walk-up building. The case begins by discussing serveral ways to fairly distribute the cost if the elevators are approved. One way is an equal split. The second way is to have the homeowners living on higher levels pay more. A formula that effectively implements the Shapley value is proposed. Next, the case describes the pivot mechanism as a way to bypass the free riding problem that would arise if homeowners were simply asked about their willingness to pay. The question for discussion is whether the homeowners would agree to use the pivot mechanism. In particular, how to explain to the homeowners the penalties that would result from implementing the mechanism and how those penalties are applied to those homeowners who are pivotal. The challenge for students is how to market the pivotal mechanism.

Recognize the free riding problem and the tragedy of the commons. Learn the pivot mechanism, a system that in a rational world implements the proper incentives to avoid the free riding problems. Discuss different methods to calculate the fair share of the cost, including an egaliatarian split and the Shapley value. Compare the pivot mechanism to other group decision methods such as majority voting, pledging, or delegation to a committee. Discuss the practical difficulties and the behavioral impediments to the success of the pivot mechanism.