# Specific investment and negotiated transfer pricing in an international transfer pricing model

Göx, Robert; Dürr, Oliver (2013). Specific investment and negotiated transfer pricing in an international transfer pricing model. Schmalenbach Business Review (sbr), 65:27-50.

## Abstract

We study the efficiency of negotiated transfer pricing for solving a bilateral hold-up problem in a multinational enterprise. We show that negotiated transfer pricing will generally not provide incentives for an efficient renegotiation of the initial contract and efficient investments because the divisions possess only one instrument for solving two problems. Either they minimize taxes or they redistribute the gains from efficient trade. The second-best solution solves the renegotiation problem under the arms length constraint. It entails that the firm either executes the ex-ante contract or entirely ignores tax considerations when making a quantity adjustment. We also find that the optimal investment decision and the optimal ex-ante contract are governed by the nature of the international tax difference.

## Abstract

We study the efficiency of negotiated transfer pricing for solving a bilateral hold-up problem in a multinational enterprise. We show that negotiated transfer pricing will generally not provide incentives for an efficient renegotiation of the initial contract and efficient investments because the divisions possess only one instrument for solving two problems. Either they minimize taxes or they redistribute the gains from efficient trade. The second-best solution solves the renegotiation problem under the arms length constraint. It entails that the firm either executes the ex-ante contract or entirely ignores tax considerations when making a quantity adjustment. We also find that the optimal investment decision and the optimal ex-ante contract are governed by the nature of the international tax difference.

## Citations

Item Type: Journal Article, refereed, original work 03 Faculty of Economics > Department of Business Administration 330 Economics English 2013 27 Jun 2013 10:01 05 Apr 2016 16:50 Schmalenbach-Gesellschaft für Betriebswirtschaft 1439-2917 merlin-id:8214

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