The Role of Transfer Price for Coordination and Control within a Firm |
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Authors: | Yeom Sungsoo Balachandran Kashi R |
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Institution: | (1) Chungnam National University, Korea;(2) Stern School of Business, 40 West Fourth Street, New York, NY, 10003 |
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Abstract: | This paper explores the role of transfer prices as coordinating mechanisms within a firm. Three cases (full information; pure adverse selection; adverse selection and moral hazard) are analyzed and compared to show how quantity and effort are affected as assumptions on observability are progrssively relaxed. The analysis of the second case, having two observable variables, identifies the necessary and sufficient condition under which the local approach can be applied. The third case is reinterpreted as transfer prices in a direct delegation setting. The main results are: First, the optimal transfer price is standard average cost plus. Second, it is not necessarily decreasing in quantity unlike the downward sloping demand function. |
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Keywords: | transfer price moral hazard information asymmetry coordination |
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