Three Essays On The Economics Of Transfer Pricing

This dissertation focuses on two important variables from the viewpoint of the multinational organization: information sharing and transfer pricing. Both play considerable roles of the operation and evaluation of both overall and divisional performance in terms of efficiency and profits. From the newly designed information-sharing games with cooperative (organization-wide) bonuses versus tournament incentives, chapter 1 presents the theoretical prediction and the empirical finding that information sharing is near the equilibrium prediction under cooperative pay but diverges sharply under tournament pay. Experimental participants share more, falsify less often, trust the information they receive from others subsidiaries more, and achieve much more accurate views of the organization's complete database when all subsidiaries are incentivized by the cooperative reward setup. Experimental results of less information sharing under tournament incentives matches qualitatively the theoretical prediction of zero sharing, which is the unique Nash Equilibrium under tournament incentives. Chapter 1 also reports cross-sectional regressions to investigate the size of treatment effects in the presence of demographic controls. Chapter 2 undertakes a dynamic analysis of how the previous round's information-sharing outcomes influence behavior in the present round. Chapter 2 reports results from regression analyses seeking to estimate conditional reaction functions that describe how subjects' current behavior responds to past experience and the partner's past experience. The results reveals further detail about how participants' behavioral interaction with each other under different incentive treatments influences the observed outcomes that describe information sharing in the context of the information-sharing game. Chapter 3 presents a new model that provides explicit formulas for optimal transfer prices as a function of the number of firms, enabling predictions about the likely effects on transfer pricing policies and profits when new firms enter. The theoretical models in Chapter 3 describe pricing behavior and industrial organization (i.e., production patterns and the presence of external versus internal markets) in equilibrium, leading to optimal output decisions and transfer prices among n multi-national enterprises, each consisting of a downstream subsidiary and an affiliated upstream parent organization.

Abstract.

The taxation of multinational corporate groups has become a major concern in the academic and political debate on the future of international taxation. In particular the arm’s length standard for the determination of transfer prices is under increasing pressure. Many countries and international bodies are now taking a closer look at the use of transfer prices for profit shifting and are exploring alternative mechanisms such as formulary apportionment for the allocation of taxing rights. With regard to this topic, this volume is the first to offer a concise analysis of transfer pricing in the international tax arena from an interdisciplinary legal and economic point of view. Fundamentals such as the efficient allocation of resources within multi-unit firms and distortions between different goals of transfer pricing as well as different aspects of it in tax and corporate law, the traditional OECD approach and practical aspects concerning intangibles, capital and risk allocation are covered by outstanding authors.