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Transfer pricing under asymmetric information


  • Alfred Wagenhofer


This paper analyses optimal transfer prices in a firm organized in two divisions. The production costs of the divisions are their respective private information. The objective of headquarters is to determine the transfer pricing method that maximizes total profit less managers' compensation. Managers are interested in their current compensation and in the market evaluation of their experience. In this setting, the paper discusses why particular transfer pricing methods found in practice and literature may induce-inefficiencies, and it identifies conditions under which each method is preferable. Major results are: a market-based transfer price does not implement the first-best solution if there are benefits from internal trade; cost-based transfer,prices may achieve first-best, and they are preferable to negotiated transfer prices if communication is cost-less; dual transfer prices do not implement the first-best solution, as long as collusion cannot be discouraged. 'There are two truisms in business. Transfer prices are wrong and charges for corporate overhead are too high.'1

Suggested Citation

  • Alfred Wagenhofer, 1994. "Transfer pricing under asymmetric information," European Accounting Review, Taylor & Francis Journals, vol. 3(1), pages 71-103.
  • Handle: RePEc:taf:euract:v:3:y:1994:i:1:p:71-103 DOI: 10.1080/09638189400000004

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    Cited by:

    1. Ulf Schiller, 1999. "Information management and transfer pricing," European Accounting Review, Taylor & Francis Journals, vol. 8(4), pages 655-673.
    2. Hans-Ulrich Küpper, 2009. "Investment-Based Cost Accounting as a Fundamental Basis of Decision-Oriented Management Accounting," Abacus, Accounting Foundation, University of Sydney, vol. 45(2), pages 249-274.
    3. repec:spr:grdene:v:22:y:2013:i:4:d:10.1007_s10726-012-9286-6 is not listed on IDEAS
    4. Sonja Brangewitz & Claus-Jochen Haake, 2013. "Cooperative Transfer Price Negotiations under Incomplete Information," Working Papers CIE 64, Paderborn University, CIE Center for International Economics.
    5. Elges, Carsten, 2016. "Die Preissetzung in Unternehmenskooperationen: Erste spieltheoretische Überlegungen," Arbeitspapiere 162, University of Münster, Institute for Cooperatives.

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