Heads I win, tails you lose: Asymmetric taxes, risk taking, and innovation

James F. Albertus, Brent Glover and Oliver Levine

Journal of Monetary Economics, 2019, vol. 105, issue C, 24-40

Abstract: When multinationals face lower tax rates abroad than in the US, transfer pricing strategies generate an asymmetry in the tax rates on a project’s profits and losses. We show that the tax savings from transfer pricing can be expressed as a long position in a call option. We use a model to show that this transfer pricing call option leads a firm to choose riskier and larger projects than it would otherwise. Thus, transfer pricing strategies do not simply reduce a firm’s taxes, they can influence the scale and types of projects undertaken.

Keywords: Corporate risk taking; Multinational corporations; Transfer pricing; Taxation; Profit shifting; Tax avoidance; R&D; Intellectual property; Corporate investment (search for similar items in EconPapers)
JEL-codes: F21 F23 G31 G32 G38 H25 H26 K34 O34 O38 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:105:y:2019:i:c:p:24-40

DOI: 10.1016/j.jmoneco.2019.04.010

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