Negotiated Versus Cost-Based Transfer Pricing

Posted: 23 Sep 1999

See all articles by Tim Baldenius

Tim Baldenius

Columbia Buiness School

Stefan J. Reichelstein

Stanford University - Stanford Graduate School of Business; CESifo (Center for Economic Studies and Ifo Institute)

Savita A. Sahay

City University of New York - Stan Ross Department of Accountancy

Abstract

This paper studies an incomplete contracting model to compare the effectiveness of alternative transfer pricing mechanisms. Transfer pricing serves the dual purpose of guiding intracompany transfers and providing incentives for upfront investments at the divisional level. When transfer prices are determined through negotiation, divisional managers will have insufficient investment incentives due to "hold-up" problems. While cost-based transfer pricing can avoid such "hold-ups", it does suffer from distortions in intracompany transfers. Our analysis shows that negotiation frequently performs better than a cost-based pricing system, though we identify circumstances under which cost-based transfer pricing emerges as the superior alternative.

JEL Classification: M40, M46, L29

Suggested Citation

Baldenius, Tim and Reichelstein, Stefan J. and Sahay, Savita, Negotiated Versus Cost-Based Transfer Pricing. Review of Accounting Studies, Vol 4, No 2, June 1999. Available at SSRN: https://ssrn.com/abstract=180910

Tim Baldenius

Columbia Buiness School ( email )

3022 Broadway
New York, NY 10027
United States

Stefan J. Reichelstein (Contact Author)

Stanford University - Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-736-1129 (Phone)
650-725-7979 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Savita Sahay

City University of New York - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
212-802-6649 (Phone)
212-802-6423 (Fax)

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