An incentive compatible approach to the transfer pricing problem

TY - JOUR

T1 - An incentive compatible approach to the transfer pricing problem

AU - Prusa, Thomas J.

N1 - Funding Information: *I would like to thank the Harry and Lynde Bradley Foundation for financial support. I received helpful comments from Reiko Aoki, David Baron, David Bizer, Shabtai Donnenfield, Garey Ramey, and especially Mike Riordan and Bob Staiger. Two anonymous referees also made numerous helpful suggestions. ‘If the firm has subsidiaries in different states and regulations ifler across states, then transfer pricing could be important. However, empirically this has not been verified. traditionally been studied in an international framework.

PY - 1990/2

Y1 - 1990/2

N2 - This paper offers an alternative approach to regulating certain types of transfer pricing. If the multinational enterprise's transfer price decision is not regulated, it will manipulate the transfer price in order to maximize net global profit. Traditional approaches argue for ad hoc penalty schedules to mitigate manipulative transfer pricing; in contrast, this paper offers an incentive compatible approach which explicitly incorporates the informational asymmetries that encourage misreports. The model has the desirous feature that the optimal regulatory policy has 'self-enforcing' properties. That is, the firm will find it profit maximizing to report true costs.

AB - This paper offers an alternative approach to regulating certain types of transfer pricing. If the multinational enterprise's transfer price decision is not regulated, it will manipulate the transfer price in order to maximize net global profit. Traditional approaches argue for ad hoc penalty schedules to mitigate manipulative transfer pricing; in contrast, this paper offers an incentive compatible approach which explicitly incorporates the informational asymmetries that encourage misreports. The model has the desirous feature that the optimal regulatory policy has 'self-enforcing' properties. That is, the firm will find it profit maximizing to report true costs.

UR - https://www.scopus.com/pages/publications/38249018898

UR - https://www.scopus.com/pages/publications/38249018898#tab=citedBy

U2 - 10.1016/0022-1996(90)90054-P

DO - 10.1016/0022-1996(90)90054-P

M3 - Article

SN - 0022-1996

VL - 28

SP - 155

EP - 172

JO - Journal of International Economics

JF - Journal of International Economics

IS - 1-2

ER -