Information Technology, Organizational Design, and Transfer Pricing

61 Pages Posted: 7 Mar 2006 Last revised: 27 Feb 2015

See all articles by Shane S. Dikolli

Shane S. Dikolli

Darden School of Business University of Virginia

Igor Vaysman

CUNY Baruch College, Zicklin School of Business

Date Written: June 2, 2005

Abstract

We show how information technology affects transfer pricing. With coarse information technology, negotiated transfer pricing has an informational advantage: managers agree to prices that approximate the firm's cost of internal trade more precisely than cost-based transfer prices. With sufficiently rapid offers, this advantage outweighs opportunity costs of managers' bargaining time, and negotiated transfer pricing generates higher profits than the cost-based method. However, as information technology improves, the informational advantage diminishes; the opportunity costs of managers' bargaining eventually dominate, and cost-based methods generate higher profits. Our results explain why firms generally prefer cost-based methods, and when negotiated methods are preferable.

Keywords: Cost-based transfer pricing, Negotiated transfer pricing, Bargaining, Decentralization

JEL Classification: C72, D82, L23, M40, M46

Suggested Citation

Dikolli, Shane Sami and Vaysman, Igor, Information Technology, Organizational Design, and Transfer Pricing (June 2, 2005). Journal of Accounting & Economics, Vol. 41, Nos. 1-2, 2006. Available at SSRN: https://ssrn.com/abstract=887764

Shane Sami Dikolli

Darden School of Business University of Virginia ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
4342431018 (Phone)

Igor Vaysman (Contact Author)

CUNY Baruch College, Zicklin School of Business ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3207 (Phone)

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