Intrafirm Trade,Bargaining Power,and Specific Investments |
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Authors: | Baldenius Tim |
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Institution: | (1) Graduate School of Business, Columbia University, New York, NY, 10027 |
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Abstract: | This paper compares the performance of standard-cost with negotiated transfer pricing under asymmetric information. Negotiated transfer pricing generally achieves higher expected contribution margins, as this method tends to be more efficient in aggregating private information into a single transfer price. Standard-cost transfer pricing confers more bargaining power to the supplier and therefore generates better incentives for this division to undertake specific investments. The opposite holds for buyer investments. If a corporate controller has disaggregated information about divisional costs and revenues, then the firm can improve upon the performance of standard-cost transfer pricing by setting a centralized transfer price equal to expected cost plus a suitably chosen mark-up. |
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Keywords: | Transfer pricing asymmetric information specific investments hold-up problem |
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