Fairness in Cost Allocations: Proportionality vs. Equality

Allocation problems in accounting require joint costs to be allocated among participating agents. In this setting, however, unfair allocations can stifle cooperation and lead to inefficient group outcomes. Then, what qualifies as fair enough for individual agents to agree to cooperate and extract joint benefits? Building on prior analytical literature that has offered perspectives involving joint cost allocations, we experimentally evaluate two common notions of fairness that present competing predictions in the cost allocation context – proportionality and equality. We operationalize two notions of fairness using a behavioral approach and examine which fairness notion prevails in cost allocation problems. More specifically, we examine fairness considerations in the cost allocation context using a modified ultimatum game, where joint cost savings can only be acquired through cooperation between two agents and individual contributions are varied transparently. Our experimental evidence suggests that fairness considerations in cost allocations coincide more with the proportionality notion when individuals make different contributions to create joint benefits. These findings provide important insights on the key rationale underlying the prevalent cost allocation method in accounting practices and the design of fair cost allocations that promote cooperation among agents.