An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Hua Lee
The Chinese University of Hong Kong

Ho - Mou Wu
National Taiwan University

Abstract: The purpose of this study is to propose a transfer pricing mechanism from the viewpoint of the allocation of organizational decision-making authority in the context of one principal and two agents. This paper provides necessary conditions for the optimal organizational form accompanied by the allocation of decision authorities on the transfer price and quantity to be transferred. The main results show that, when necessary, the principal always allocates the authority to the agent with more valuable private information. The degree of decentralization is negatively associated with the importance of the private information. However, centralization is rarely the best organizational form due to the additional constraint of one transfer price in the one-principal-two-agents model. Moreover, without the decision authority over the transfer price may better serve the interest of the principal and agents.

Back to Session Listing

AAA Home Page