A large majority of firms employ negotiated transfer pricing, yet this method of decentralization remains largely unexplored. This study develops a model of negotiated transfer pricing incorporating private divisional information, as this is the setting where decentralization is most compelling. The firm designs a compensation system utilizing divisional performance evaluation and negotiated transfer pricing. A dynamic bargaining model is employed to capture managerial negotiations. The study demonstrates that the firm can design managerial-compensation schemes and bargaining infrastructures so that the negotiated transfer-pricing structure allows it to reach the upper bound on available profits.
Journal of Accounting and Economics – Elsevier
Published: Jun 30, 1998
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