Transfer Pricing and the Control of Internal Corporate Transactions

James Brickley, Clifford Smith and Jerold Zimmerman

Journal of Applied Corporate Finance, 2020, vol. 32, issue 1, 120-127

Abstract: One potential weakness of all divisional profitability schemes is their inability to capture synergies among business units. One way of managing this problem is to design a transfer pricing scheme that attempts to assign common costs and benefits to different business units. What makes transfer pricing both so interesting, and such a challenge, is that the solution involves finding a way to encourage divisional managers whose pay is likely to depend on such transfer prices to reveal their private or unbiased information about the firm's costs in a way that serves the interest of the rest of the firm. With that end in view, the authors provide a general analytical framework for setting transfer prices and go on to discuss the costs and benefits of each of the most common transfer‐pricing methods: (1) market pricing; (2) marginal cost pricing; (3) full‐cost pricing; and (4) negotiated prices.

Date: 2020
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https://doi.org/10.1111/jacf.12393

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Journal Article: TRANSFER PRICING AND THE CONTROL OF INTERNAL CORPORATE TRANSACTIONS (1995)
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