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The Role of Transfer Price for Coordination and Control within a Firm

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  • Yeom, Sungsoo
  • Balachandran, Kashi R
  • Ronen, Joshua

Abstract

This paper explores the role of transfer prices as coordinating mechanisms within a firm. Three cases (full information; pure adverse selection; adverse selection and moral hazard) are analyzed and compared to show how quantity and effort are affected as assumptions on observability are progressively relaxed. The analysis of the second case, having two observable variables, identifies the necessary and sufficient condition under which "the local approach" can be applied. The third case is reinterpreted as transfer prices in a direct delegation setting. The main results are: First, the optimal transfer price is standard average cost plus. Second, it is not necessarily decreasing in quantity unlike the downward sloping demand function. Copyright 2000 by Kluwer Academic Publishers

Suggested Citation

  • Yeom, Sungsoo & Balachandran, Kashi R & Ronen, Joshua, 2000. "The Role of Transfer Price for Coordination and Control within a Firm," Review of Quantitative Finance and Accounting, Springer, vol. 14(2), pages 161-192, March.
    • Handle: RePEc:kap:rqfnac:v:14:y:2000:i:2:p:161-92
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    References listed on IDEAS

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    2. Wang Lina & Milis Koen & Poelmans Stephen, 2021. "Study on Pollution Cost Control Model under Asymmetric Information Based on Principal Agent," Journal of Systems Science and Information, De Gruyter, vol. 9(5), pages 549-557, October.

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