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Transfer Pricing in the Decentralized Multinational Corporation

Listed author(s):
  • Peter C. Dawson

    (Internal Revenue Service, Dallas)

  • Stephen M. Miller

    (University of Connecticut)

This paper considers how the multinational corporation's transfer price responds to changes in international corporate effective tax rates. It extends the decentralized decision-making analysis of transfer pricing in the context of different tax rates. It adopts and extends Bond's (1980) model of the decentralized multinational corporation that assumes centralized transfer pricing. The direction of transfer price change is as expected, while the magnitude of change is likely to be less than predicted by the Horst (1971), centralized decision-making model. The paper extends the model further by assuming negotiated transfer pricing, where the analysis is partitioned into perfect and imperfect information cases. The negotiated transfer pricing result reverts to the Horst (1971), or centralized decision-making, result, under perfect information. Under imperfect information, the centralized decision-making result obtains when top management successfully informs division general managers or it successfully implements a non-monetary reward scheme to encourage division general managers to cooperate. Under simplifying assumptions, centralized decision-making dominates decentralized decision-making, while negotiated transfer pricing weakly dominates centralized transfer pricing.

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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2000-06.

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Length: 39 pages
Date of creation: Jul 2000
Handle: RePEc:uct:uconnp:2000-06
Note: The contents of this article are the opinions of the writers and do not necessarily represent the position of the Internal Revenue Service.
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  1. L. W. Copithorne, 1971. "International Corporate Transfer Prices and Government Policy," Canadian Journal of Economics, Canadian Economics Association, vol. 4(3), pages 324-341, August.
  2. Kant, Chander, 1988. "Endogenous transfer pricing and the effects of uncertain regulation," Journal of International Economics, Elsevier, vol. 24(1-2), pages 147-157, February.
  3. Kalyan Chatterjee & Larry Samuelson, 1987. "Bargaining with Two-sided Incomplete Information: An Infinite Horizon Model with Alternating Offers," Review of Economic Studies, Oxford University Press, vol. 54(2), pages 175-192.
  4. Spicer, Barry H., 1988. "Towards an organizational theory of the transfer pricing process," Accounting, Organizations and Society, Elsevier, vol. 13(3), pages 303-322, April.
  5. Schjelderup, G. & Sorgard, L., 1995. "The Multinational Firn Transfer Pricing and the Natural Competition," Papers 16/95, Norwegian School of Economics and Business Administration-.
  6. Guttorm Schjelderup & Lars Sorgard, 1997. "Transfer Pricing as a Strategic Device for Decentralized Multinationals," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 4(3), pages 277-290, July.
  7. Linhart, Peter & Radner, Roy & Satterthwaite, Mark, 1989. "Introduction: Symposium on Noncooperative Bargaining," Journal of Economic Theory, Elsevier, vol. 48(1), pages 1-17, June.
  8. Sopher, Barry, 1993. "A laboratory analysis of bargaining power in a random ultimatum game," Journal of Economic Behavior & Organization, Elsevier, vol. 21(1), pages 69-90, May.
  9. Hoel, M., 1989. "Global Environmental Problems: The Effects Of Unilateral Actions Taken By One Country," Memorandum 11/1989, Oslo University, Department of Economics.
  10. Horst, Thomas, 1971. "The Theory of the Multinational Firm: Optimal Behavior under Different Tariff and Tax Rates," Journal of Political Economy, University of Chicago Press, vol. 79(5), pages 1059-1072, Sept.-Oct.
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