TRANSFER PRICING POLICY FOR DEVELOPING COUNTRIES – AN INCENTIVE COMPATIBLE APPROACH

Devika Bhatia and Sangeeta Bansal
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Devika Bhatia: Economics Discipline, Business School, University of Western Australia, https://www.web.uwa.edu.au/person/devika.bhatia

No 20-14, Economics Discussion / Working Papers from The University of Western Australia, Department of Economics

Abstract: Profit shifting in transfer pricing arises due to the informational advantage of the multinational enterprise (MNE) with its cost structure. This paper explores the possibility of designing a tariff structure as an incentive compatible instrument to elicit a truthful response from the firm regarding its cost structure. Under perfectly competitive markets, incentive compatible tariffs exist and are also used in analysing pooling and separating equilibria. The paper can be extended to include other instruments such as APAs. Other extensions can be in the direction of including multiple governments competing for investment by a given MNE in the context of a multiple principals and single agent.

Keywords: transfer pricing; game theory; mechanism design; principal agent model; incentive compatibility (search for similar items in EconPapers)
JEL-codes: C70 C73 D82 F23 H26 (search for similar items in EconPapers)
Pages: 26
Date: 2020
New Economics Papers: this item is included in nep-ore and nep-reg
Note: MD5 = 87453c98ec045f68f63d983454f0dae1
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Persistent link: https://EconPapers.repec.org/RePEc:uwa:wpaper:20-14

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