Shapley Value

DEFINITION of 'Shapley Value'

In game theory, a manner of fairly distributing both gains and costs to several actors working in coalition. The Shapley value applies primarily in situations when the contributions of each actor are unequal. The Shapley value ensures each actor gains as much or more as they would have from acting independently. This is important, because otherwise there is no incentive for actors to collaborate.

BREAKING DOWN 'Shapley Value'

A famous example of the Shapley value in practice is the airport problem. In the problem, an airport needs to be built in order to accommodate a range of aircraft which require different lengths of runway. The question is how to distribute the costs of the airport to all actors in an equitable manner. The solution is simply to spread the marginal cost of each required length of runway amongst all the actors needing a runway of at least that length. In the end, actors requiring a shorter runway pay less, and those needing a longer runway pay more. However, none of the actors pay as much as they would have if they had chosen not to cooperate.



RELATED TERMS
  1. Foam The Runway

    A term indicating the last-minute infusion of cash into a company ...
  2. Airport Revenue Bond

    A bond issued by a municipality or airport authority that uses ...
  3. Airport Tax

    A tax levied on passengers for passing through an airport. The ...
  4. Comparative Advantage

    The ability of a firm or individual to produce goods and/or services ...
  5. Above-The-Line Costs

    Costs incurred during the production of an advertising commercial ...
  6. Arm's Length Transaction

    A transaction in which the buyers and sellers of a product act ...
Related Articles
  1. Investing

    What is Value Added?

    Value added is used to describe instances where a firm takes a product and adds a feature that gives customers a greater sense of value.
  2. Managing Wealth

    A Look At Robin Williams' Net Worth and What Happened to His Estate

    Understand what happened to Robin Williams' estate and what his estate included. Learn about the court battle over his remaining possessions.
  3. Managing Wealth

    The Top Six Richest Supermodels

    Through excellent investing, brand management and high earnings, these six supermodels have cultivated multi-million dollar net worths.
  4. Investing

    5 Nobel Prize-Winning Economic Theories You Should Know About

    Here are 5 prize-winning economic theories that you’ll want to be familiar with.
  5. Investing

    Celebrities Who Opened Their Own Businesses

    From Gwyneth Paltrow's Goop to Jessica Alba's "Honest" products, a look at celebrities who have become entrepreneurs.
  6. Managing Wealth

    Investment Value Vs. Fair Market Value: How They Differ

    Learn about the differences between an asset's investment value and its fair market value, including why many think fair market value is unrealistic.
  7. Investing

    Arm's Length Transaction

    An arm’s length transaction describes business deals in which the buyer and seller act independently and with no interest in the other’s benefit.
  8. Managing Wealth

    How To Become A Renewable Energy Entrepreneur

    The recent trend towards greener, more sustainable technology is creating many opportunities for entrepreneurial-minded individuals.
  9. Investing

    3 Things Travelers Wish They Had While Flying

    Traveling can sometimes be a hassle if things don't go as smoothly as you'd like. Having certain luxuries can make the trip a little easier.
  10. Markets

    Employability, The Labor Force And The Economy

    Individuals do not have absolute control of their employability since employability is also affected by market and economic conditions.
RELATED FAQS
  1. How does government policy impact microeconomics?

    Read about how any type of government policy necessarily impacts the microeconomic decisions that are made by individuals ... Read Answer >>
  2. How does economics study human action and behavior?

    Find out why economics can be considered a deductive social science, like sociology, and how human action and behavior informs ... Read Answer >>
  3. What are the main methods for calculating business costs?

    See why different economic actors use different methods for calculating costs, and learn how different methods can impact ... Read Answer >>
  4. Do any markets not exhibit asymmetric information?

    Find out why every market possesses information asymmetry, and why this isn't necessarily a huge or insurmountable problem ... Read Answer >>
  5. How reliable or accurate is marginal analysis?

    Learn why predictive marginal analysis is limited by human knowledge and reason, but reflective marginal analysis can always ... Read Answer >>
  6. How does a high discount rate affect the economy?

    Find out what would happen if the Federal Reserve decided to set a very high discount rate, the rate at which banks can borrow ... Read Answer >>
Hot Definitions
  1. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  2. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  3. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  4. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  5. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  6. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
Trading Center