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Transfer Pricing and the Control of Internal Corporate Transactions

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  • James Brickley
  • Clifford Smith
  • Jerold Zimmerman

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.

Suggested Citation

  • James Brickley & Clifford Smith & Jerold Zimmerman, 2020. "Transfer Pricing and the Control of Internal Corporate Transactions," Journal of Applied Corporate Finance, Morgan Stanley, vol. 32(1), pages 120-127, March.
    • Handle: RePEc:bla:jacrfn:v:32:y:2020:i:1:p:120-127
    DOI: 10.1111/jacf.12393
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