Intrafirm Trade, Bargaining Power, and Specific Investments

Tim Baldenius
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Tim Baldenius: Columbia University

Review of Accounting Studies, 2000, vol. 5, issue 1, No 2, 27-56

Abstract: 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.

Keywords: Transfer pricing; asymmetric information; specific investments; hold-up problem (search for similar items in EconPapers)
Date: 2000
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DOI: 10.1023/A:1009612901910

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