Abstract
This paper investigates standard cost-based transfer prices in a two-period setting. We analyze whether and how firms should use cost information observed after the first period to revise the transfer price for the second period. Updating the transfer price improves trading decisions if realized cost helps predict future costs, but it causes underinvestment in cost reduction. We find that firms benefit from revising the transfer price based on realized cost instead of keeping it fixed for both periods. Moreover, optimally balancing trade and investment efficiency requires that the firm commits ex ante to a transfer price that does not fully use the information contained in past cost observations to update expected costs in future periods.
| Original language | English |
|---|---|
| Journal | European Accounting Review |
| Volume | 33 |
| Issue | 3 |
| Pages (from-to) | 881-900 |
| Number of pages | 20 |
| ISSN | 0963-8180 |
| DOIs | |
| Publication status | Published - 2024 |
Keywords
- Commitment
- Long-term investments
- Multi-period model
- Transfer pricing