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Transfer Pricing Policy For Developing Countries – An Incentive Compatible Approach

Author

Listed:
  • Devika Bhatia

    (Economics Discipline, Business School, University of Western Australia)

  • Sangeeta Bansal

    (Jawaharlal Nehru University, New Delhi)

Abstract

Profit shifting in transfer pricing arises due to the informational advantage of the multinational enterprise (MNE) with its cost structure. This paper explores the possibility of designing a tariff structure as an incentive compatible instrument to elicit a truthful response from the firm regarding its cost structure. Under perfectly competitive markets, incentive compatible tariffs exist and are also used in analysing pooling and separating equilibria. The paper can be extended to include other instruments such as APAs. Other extensions can be in the direction of including multiple governments competing for investment by a given MNE in the context of a multiple principals and single agent.

Suggested Citation

  • Devika Bhatia & Sangeeta Bansal, 2020. "Transfer Pricing Policy For Developing Countries – An Incentive Compatible Approach," Economics Discussion / Working Papers 20-14, The University of Western Australia, Department of Economics.
    • Handle: RePEc:uwa:wpaper:20-14
    Note: MD5 = 87453c98ec045f68f63d983454f0dae1
    as

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    File URL: https://ecompapers.biz.uwa.edu.au/paper/PDF%20of%20Discussion%20Papers/2020/DP%2020.14_Bhatia%20and%20Bansal.pdf
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    References listed on IDEAS

    as
    1. Michael Adler & Guy V. G. Stevens, 1974. "Direct investment and trade: an analysis of the export displacement effect," International Finance Discussion Papers 41, Board of Governors of the Federal Reserve System (U.S.).
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      More about this item

      Keywords

      transfer pricing; game theory; mechanism design; principal agent model; incentive compatibility;
      All these keywords.

      JEL classification:

      • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
      • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
      • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
      • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
      • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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