Abstract
While it is generally believed that insulating cost allocations help managers focus their attention on their own actions and shield them from the actions of others, non-insulating schemes can have appeal by encouraging teamwork and/or mutual monitoring among divisions. In this paper, we demonstrate that non-insulating allocations can induce fruitful cooperation among parties even when teamwork and mutual monitoring are nonissues. In particular, we show that in the case of intra-firm trade governed by transfer pricing, non-insulating allocations can permit one division to internalize benefits of private information borne by another and thereby alleviate information-induced trade barriers. Unlike in the traditional case of fostering teamwork, however, the cooperative nature of non-insulating allocation introduced by information differences is distinctly more circumstance-specific. In line with this view, the paper also identifies conditions under which the use of non-insulating allocation shifts divisional incentives in a manner that only adds further tension to trade.