The Effect of Insulating and Non-Insulating Cost Allocations on Risk and Cooperation

41 Pages Posted: 16 Oct 2020

See all articles by Jason Brown

Jason Brown

Indiana University - Kelley School of Business - Department of Accounting

Geoffrey B. Sprinkle

Indiana University - Kelley School of Business - Department of Accounting

Dan Way

Clemson University - School of Accountancy

Date Written: August 1, 2020

Abstract

Firms allocate shared costs for decision-making, control, and reporting purposes. One important choice firms face with regard to cost allocations is whether they should be insulating or non-insulating. Non-insulating allocations follow ability-to-bear principles and allocate costs based on relative performance measures, creating an inter-dependency between managers. On the other hand, insulating allocations are independent of relative performance during the period. In an experiment, we predict and find that, compared to participants in an insulating cost allocation condition, participants in a non-insulating cost allocation condition chose capital projects with greater risk, developed stronger group identification, and perceived their allocation method to be less fair. We also find that, as posited, both group identification and perceptions of fairness have positive effects on cooperation. We do not, however, find overall differences in cooperation between cost allocation conditions – essentially, the effects of cost allocation condition on cooperation operating through group identification and fairness perceptions offset each other. Collectively, our study and findings have important implications regarding the design and use of cost allocations to motivate desired attitudes and behaviors.

Keywords: cost allocations, risk-taking, group identification, fairness, cooperation

Suggested Citation

Brown, Jason and Sprinkle, Geoffrey B. and Way, Dan, The Effect of Insulating and Non-Insulating Cost Allocations on Risk and Cooperation (August 1, 2020). Available at SSRN: https://ssrn.com/abstract=3682238 or http://dx.doi.org/10.2139/ssrn.3682238

Jason Brown

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Geoffrey B. Sprinkle

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-3514 (Phone)
812-855-4985 (Fax)

Dan Way (Contact Author)

Clemson University - School of Accountancy ( email )

101 Sikes Ave
Clemson, SC 29634
United States

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