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Transfer pricing under asymmetric information

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  • Alfred Wagenhofer

Abstract

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. Ghosh, Dipankar, 2000. "Complementary arrangements of organizational factors and outcomes of negotiated transfer price," Accounting, Organizations and Society, Elsevier, vol. 25(7), pages 661-682, October.
    2. V. G. Narayanan & Michael Smith, 2000. "Impact of Competition and Taxes on Responsibility Center Organization and Transfer Prices," Contemporary Accounting Research, John Wiley & Sons, vol. 17(3), pages 497-529, September.
    3. Alexis H. Kunz & Thomas Pfeiffer, 2001. "Kapitalmarktorientierte Unternehmenspublizität und der Informationsverbund zwischen in- und externem Rechnungswesen," Schmalenbach Journal of Business Research, Springer, vol. 53(5), pages 500-530, August.
    4. Clemens Löffler & Thomas Pfeiffer & Ulf Schiller & Joachim Wagner, 2011. "Zentralisierung, Transferpreise und spezifische Investitionen: Ein selektiver Verfahrensvergleich," Schmalenbach Journal of Business Research, Springer, vol. 63(63), pages 1-33, January.
    5. Oliver M. Dürr & Robert F. Göx, 2011. "Strategic Incentives for Keeping One Set of Books in International Transfer Pricing," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(1), pages 269-298, March.
    6. Eric John Slof, 1999. "Transfer prices and incentive contracts in vertically-integrated divisionalized companies," European Accounting Review, Taylor & Francis Journals, vol. 8(2), pages 265-286.
    7. Claus-Jochen Haake & Sonja Recker, 2018. "The Generalized Nash Bargaining Solution for Transfer Price Negotiations Under Incomplete Information," Group Decision and Negotiation, Springer, vol. 27(6), pages 905-932, December.
    8. Thomas Pfeiffer, 2004. "The Value of Information in the Hold‐Up Problem," German Economic Review, Verein für Socialpolitik, vol. 5(2), pages 177-203, May.
    9. Ulf Schiller, 1999. "Information management and transfer pricing," European Accounting Review, Taylor & Francis Journals, vol. 8(4), pages 655-673.
    10. John A. Christensen, 2004. "Discussion," German Economic Review, Verein für Socialpolitik, vol. 5(2), pages 231-235, May.
    11. 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, June.
    12. Claus-Jochen Haake & Jan Thomas Martini, 2013. "Negotiating Transfer Prices," Group Decision and Negotiation, Springer, vol. 22(4), pages 657-680, July.
    13. Baldenius, Tim & Reichelstein, Stefan J., 2004. "External and Internal Pricing in Multidivisional Firms," Research Papers 1825r, Stanford University, Graduate School of Business.
    14. Sonja Brangewitz & Claus-Jochen Haake, 2013. "Cooperative Transfer Price Negotiations under Incomplete Information," Working Papers CIE 64, Paderborn University, CIE Center for International Economics.
    15. Savita A. Sahay, 2014. "Transfer Pricing in a Multi-Product Environment," Accounting and Finance Research, Sciedu Press, vol. 3(4), pages 132-132, August.
    16. Elges, Carsten, 2016. "Die Preissetzung in Unternehmenskooperationen: Erste spieltheoretische Überlegungen," Arbeitspapiere 162, University of Münster, Institute for Cooperatives.

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