The literature on the regulation of multinationals' transfer prices has not considered the possibility that governments choose their transfer pricing rules in a non-cooperative fashion. The present paper fills this gap and shows that a non-cooperative equilibrium is characterized by above-optimal levels of effective taxation in comparison with a cooperative solution. We also derive conditions under which harmonization of transfer pricing rules lead to a Pareto improvement, and show that harmonization according to the 'arm's length' principle is not Pareto improving relative to the non-cooperative outcome.
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Find related papers by JEL classification: F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
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