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Information management and transfer pricing

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Author Info
Ulf Schiller
Abstract

The paper considers information flow in a profit-centre organization. There is internal trade between two divisions. Headquarters records realized sales revenues and decides whether or not to pass this information on to the selling division. The selling division announces a cost-based transfer-price schedule that includes a mark-up on variable cost. From headquarters' perspective, the key issue is to influence the seller's manipulation of the mark-up. Knowledge about revenue enables the seller to squeeze intermediate profits out of the buyer and, moreover, to mitigate trade distortions. However, this comes at a cost. If the buying division receives a lower share of joint profit there arises a distortion of incentives for revenue-increasing efforts. Thus, the appropriate management of revenue information serves as a non-trivial tool to close gaps between the objectives of the whole firm and those of the divisions.

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Article provided by Taylor and Francis Journals in its journal European Accounting Review.

Volume (Year): 8 (1999)
Issue (Month): 4 (December)
Pages: 655-673
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Handle: RePEc:taf:euract:v:8:y:1999:i:4:p:655-673

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December. [Downloadable!] (restricted)
  2. Vaysman, Igor, 1998. "A model of negotiated transfer pricing," Journal of Accounting and Economics, Elsevier, vol. 25(3), pages 349-384, June. [Downloadable!] (restricted)
  3. Dewatripont, Mathias, 1988. "Commitment through Renegotiation-Proof Contracts with Third Parties," Review of Economic Studies, Blackwell Publishing, vol. 55(3), pages 377-89, July. [Downloadable!] (restricted)
  4. Nahum Melamad & Dilip Mookherjee & Stefan Reichelstein, 1996. "Contract Complexity, Incentives and the Value of Delegation," Papers 0070, Boston University - Industry Studies Programme.
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  5. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August. [Downloadable!] (restricted)
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  6. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Alnoor Bhimani, 2002. "European management accounting research: traditions in the making," European Accounting Review, Taylor and Francis Journals, vol. 11(1), pages 99-117, May. [Downloadable!] (restricted)
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