Details
| Original language | English |
|---|---|
| Pages (from-to) | 197-216 |
| Number of pages | 20 |
| Journal | Review of accounting studies |
| Volume | 5 |
| Issue number | 3 |
| Publication status | Published - Sept 2000 |
| Externally published | Yes |
Abstract
This paper investigates investment decisions in a divisionalized firm, in which an upstream division supplies an intermediate product to a downstream division. The upstream division's investment includes two simultaneous decisions. First, the division determines its capacity level, and second, it invests in a firm specific production technology that lowers the marginal cost of production. Both the capacity and the specificity decision must be made before the actual demand for the intermediate product is observable. Since the terms of internal trade are negotiated between the divisions, the upstream division faces the well-known holdup problem and thus has incentives to underinvest. It turns out that a simple contract stipulating a minimum quantity and a transfer price for excessive quantities is sufficient to induce the efficient capacity and specificity decisions.
Keywords
- Hold-up problem, Specific investments, Transfer pricing
ASJC Scopus subject areas
- Business, Management and Accounting(all)
- Accounting
- Business, Management and Accounting(all)
- General Business,Management and Accounting
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In: Review of accounting studies, Vol. 5, No. 3, 09.2000, p. 197-216.
Research output: Contribution to journal › Article › Research › peer review
}
TY - JOUR
T1 - Negotiated transfer pricing, specific investment, and optimal capacity choice
AU - Wielenberg, Stefan
PY - 2000/9
Y1 - 2000/9
N2 - This paper investigates investment decisions in a divisionalized firm, in which an upstream division supplies an intermediate product to a downstream division. The upstream division's investment includes two simultaneous decisions. First, the division determines its capacity level, and second, it invests in a firm specific production technology that lowers the marginal cost of production. Both the capacity and the specificity decision must be made before the actual demand for the intermediate product is observable. Since the terms of internal trade are negotiated between the divisions, the upstream division faces the well-known holdup problem and thus has incentives to underinvest. It turns out that a simple contract stipulating a minimum quantity and a transfer price for excessive quantities is sufficient to induce the efficient capacity and specificity decisions.
AB - This paper investigates investment decisions in a divisionalized firm, in which an upstream division supplies an intermediate product to a downstream division. The upstream division's investment includes two simultaneous decisions. First, the division determines its capacity level, and second, it invests in a firm specific production technology that lowers the marginal cost of production. Both the capacity and the specificity decision must be made before the actual demand for the intermediate product is observable. Since the terms of internal trade are negotiated between the divisions, the upstream division faces the well-known holdup problem and thus has incentives to underinvest. It turns out that a simple contract stipulating a minimum quantity and a transfer price for excessive quantities is sufficient to induce the efficient capacity and specificity decisions.
KW - Hold-up problem
KW - Specific investments
KW - Transfer pricing
UR - http://www.scopus.com/inward/record.url?scp=3042600766&partnerID=8YFLogxK
U2 - 10.1023/A:1009604809480
DO - 10.1023/A:1009604809480
M3 - Article
AN - SCOPUS:3042600766
VL - 5
SP - 197
EP - 216
JO - Review of accounting studies
JF - Review of accounting studies
SN - 1380-6653
IS - 3
ER -