Specific Investment and Negotiated Transfer Pricing in an International Transfer Pricing Model

28 Pages Posted: 26 Jun 2010 Last revised: 21 Nov 2011

See all articles by Oliver M. Dürr

Oliver M. Dürr

Esslingen University of Applied Sciences

Robert F. Göx

University of Zurich - Department of Business Administration (IBW); University of Zurich - Managerial Accounting; University of Zurich - Faculty of Economics, Business Administration and Information Technology

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Date Written: June 1, 2010

Abstract

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.

Keywords: Specific Investment, Transfer Pricing

JEL Classification: M41, C71, L14

Suggested Citation

Duerr, Oliver M. and Goex, Robert F., Specific Investment and Negotiated Transfer Pricing in an International Transfer Pricing Model (June 1, 2010). AAA 2011 Management Accounting Section (MAS) Meeting Paper, Available at SSRN: https://ssrn.com/abstract=1628431 or http://dx.doi.org/10.2139/ssrn.1628431

Oliver M. Duerr (Contact Author)

Esslingen University of Applied Sciences ( email )

Flandernstrasse 101
Esslingen, Baden-Wurttemberg 73732
Germany
+49-711-397-4312 (Phone)

Robert F. Goex

University of Zurich - Department of Business Administration (IBW) ( email )

Plattenstrasse 14
Zurich, 8032
Switzerland

University of Zurich - Managerial Accounting ( email )

Plattenstrasse 14
Zurich, CH-8032
Switzerland

University of Zurich - Faculty of Economics, Business Administration and Information Technology ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

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