How should companies price goods that they ship between their own divisions or related companies?
Internationally, that quandary confronts the producers of nearly half of all U.S. imported goods, a third of all U.S. exports, and a huge proportion of global trade elsewhere. By definition these aren’t arms-length deals in an open marketplace, and they raise tough questions. What price, for instance, might Ford of Germany charge a Ford division in Mexico for German-made engines that are installed in Mexican-assembled cars?
In a prize-winning research paper, Business School accounting professor Stefan Reichelstein and coauthors Tim Baldenius and Nahum Melumad of Columbia University have developed a real-world answer to transfer pricing that balances both the economic criteria confronted by Hirshleifer and the puzzle of international tax rates.
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