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Strategic incentives for kepping one set of books under the Arm's Length Principle

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  • Lemus, A.
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    The OECD recommendation that transfer prices between parent firms and their subsidiaries be consistent with the Arm's Length Principle (ALP) for tax purposes does not restrict internal pricing policies. I show that under imperfect competition parents' accounting policies determine the properties of market outcomes: if parents keep one set of books (i.e., their internal transfer prices are consistent with the ALP), then competition in the external (home) market softens (intensifies) relative to the equilibrium where parents and subsidiaries are integrated. In contrast, if firms keep two sets of books (i.e., their internal transfer prices differ from those used for tax purposes) or maintain asymmetric accounting policies, then competition intensifies in both markets. Keeping one set of books is equilibrium in most of the parameter space.

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    File URL: http://e-archivo.uc3m.es/bitstream/handle/10016/15096/we1135.pdf?sequence=1
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    Paper provided by Universidad Carlos III de Madrid. Departamento de Economía in its series UC3M Working papers. Economics with number we1135.

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    Date of creation: Nov 2011
    Handle: RePEc:cte:werepe:we1135
    Contact details of provider: Web page: http://www.eco.uc3m.es/

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    1. Anil Arya & Brian Mittendorf, 2008. "Pricing Internal Trade to Get a Leg up on External Rivals," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(3), pages 709-731, 09.
    2. Søren Bo Nielsen & Pascalis Raimondos-Møller & Guttorm Schjelderup, 2008. "Taxes and Decision Rights in Multinationals," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(2), pages 245-258, 04.
    3. Choe, Chongwoo & Matsushima, Noriaki, 2013. "The arm's length principle and tacit collusion," International Journal of Industrial Organization, Elsevier, vol. 31(1), pages 119-130.
    4. Alan Auerbach & Michael P. Devereux & Helen Simpson, 2007. "Taxing Corporate Income," CESifo Working Paper Series 2139, CESifo Group Munich.
    5. Charles E. Hyde & Chongwoo Choe, 2005. "Keeping Two Sets of Books: The Relationship Between Tax and Incentive Transfer Prices," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(1), pages 165-186, 03.
    6. Korn, Evelyn & Lengsfeld, Stephan, 2007. "Duopolistic Competition, Taxes, and the Arm's-Length Principle," Hannover Economic Papers (HEP) dp-378, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    7. Ubeda, Luis & Moreno, Diego, 2001. "Capacity precommitment and price competition yield cournot outcomes," UC3M Working papers. Economics we014408, Universidad Carlos III de Madrid. Departamento de Economía.
    8. Moreno, Diego & Lemus, A., 2011. "The non-neutrality of the arm's length principle with imperfect competition," UC3M Working papers. Economics we1134, Universidad Carlos III de Madrid. Departamento de Economía.
    9. Ware, Roger, 1985. "Inventory Holding as a Strategic Weapon to Deter Entry," Economica, London School of Economics and Political Science, vol. 52(205), pages 93-101, February.
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