Specific Investment and Negotiated Transfer Pricing in an International Transfer Pricing Model
Oliver M. Dürr
University of Fribourg - Faculty of Economics and Social Science
Robert F. Göx
University of Zurich - Department of Business Administration (IBW); University of Zurich; University of Zurich - Faculty of Economics, Business Administration and Information Technology
June 1, 2010
AAA 2011 Management Accounting Section (MAS) Meeting Paper
We study the efficiency of the negotiated transfer pricing mechanism proposed by Edlin and Reichelstein (1995) for solving a bilateral holdup problem in a multinational enterprise. Our main finding is that the proposed renegotiation procedure will generally not provide incentives for efficient renegotiations of the initial trade quantity if the same transfer price is also used for minimizing the global tax bill. Moreover, given that efficient renegotiations are expected to fail, the divisions will not make efficient investments in the first place. Nevertheless, we demonstrate that Pareto improving renegotiations are still possible in many cases but the first-best solution can generally not be attained. Finally, we demonstrate that the conflict between the two functions of transfer pricing can be solved by the use of different transfer prices for tax and managerial purposes. Since using a second set of books is costly, the firm faces a cost-benefit trade-off that can only be solved in the context of a particular decision problem.
Number of Pages in PDF File: 28
Keywords: Specific Investment, Transfer Pricing
JEL Classification: M41, C71, L14working papers series
Date posted: June 26, 2010 ; Last revised: November 21, 2011
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