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

Schmalenbach Business Review, Vol. 65, January 2013, pp. 27-50

24 Pages Posted: 16 Oct 2013

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

Multiple version iconThere are 2 versions of this paper

Date Written: 2013

Abstract

We study the efficiency of negotiated transfer pricing for solving a bilateral hold-up problem in a multinational enterprise. We show that negotiated transfer pricing will generally not provide incentives for an efficient renegotiation of the initial contract and efficient investments because the divisions possess only one instrument for solving two problems. Either they minimize taxes or they redistribute the gains from efficient trade. The second-best solution solves the renegotiation problem under the arm‘s length constraint. It entails that the firm either executes the ex-ante contract or entirely ignores tax considerations when making a quantity adjustment. We also find that the optimal investment decision and the optimal ex-ante contract are governed by the nature of the international tax difference.

Keywords: International Taxation, Specific Investments, Transfer Pricing

JEL Classification: C78, M16, M41

Suggested Citation

Duerr, Oliver M. and Goex, Robert F., Specific Investment and Negotiated Transfer Pricing in an International Transfer Pricing Model (2013). Schmalenbach Business Review, Vol. 65, January 2013, pp. 27-50, Available at SSRN: https://ssrn.com/abstract=2340435

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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