Negotiated versus Cost-Based Transfer Pricing

Negotiated versus Cost-Based Transfer Pricing This paper studies an incomplete contracting model to compare the effectiveness of alternative transfer pricing mechanisms. Transfer pricing serves the dual purpose of guiding intracompany transfers and providing incentives for upfront investments at the divisional level. When transfer prices are determined through negotiation, divisional managers will have insufficient investment incentives due to “hold-up” problems. While cost-based transfer pricing can avoid such “hold-ups”, it does suffer from distortions in intracompany transfers. Our analysis shows that negotiation frequently performs better than a cost-based pricing system, though we identify circumstances under which cost-based transfer pricing emerges as the superior alternative. Review of Accounting Studies Springer Journals

Negotiated versus Cost-Based Transfer Pricing

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Kluwer Academic Publishers
Copyright © 1999 by Kluwer Academic Publishers
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
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  • Intrafirm Resource Allocation: The Economics of Transfer Pricing and Cost Allocation in Accounting
    Amershi, A.; Cheng, P.

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