The Effects of Insulating and Noninsulating Cost Allocations on Cooperation and Risk-Taking

What the paper says

Cost allocations affect managers’ reported performance, making the selection of allocation methods an important control choice. Noninsulating allocations distribute costs based on realized relative performance, whereas insulating allocations are independent of relative performance. As such, noninsulating allocations create a contemporaneous interdependence between managers’ outcomes that is not present under insulating allocations. We conduct two experiments to examine how insulating and noninsulating cost allocations influence two important behaviors—cooperation and risk-taking—that impact firm performance and that theory suggests are likely affected by the fundamental differences between the two allocation methods. We find that noninsulating allocations lead to greater cooperation between managers, and greater risk-taking, than insulating allocations. We also find that noninsulating allocations lead to stronger group identification but are perceived to be less fair than insulating allocations. Collectively, our findings contribute to research and practice regarding the use of cost allocations to motivate desired attitudes and behaviors. Data Availability: Data are available from the authors upon request.