Preservation of Incentives Inside the Firm: A Case Study of a Quasi-market for Cost-based Transfer Pricing

Ivar Friis*

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

235 Downloads (Pure)

Abstract

According to organizational economists, the implementation of market-like control mechanisms, such as transfer prices, can never completely replicate the market since “the use of high-powered incentives in firms is inherently subject to corruption” (Williamson 1985, 140). This paper illustrates that this is not necessarily always so. By means of a case study, this paper illustrates that many problems that extant research claims are related to cost-based transfer prices were mitigated through an organizational design that created a quasi-market inside the firm. The paper contributes to extant research in several ways. First, it illustrates that strong incentives are somewhat preserved through an organizational design that fosters competition between product divisions. Second, the paper shows how the specific problems related to a standard variable cost transfer price were mitigated. Finally, the paper highlights the limits of the quasi-market and describes a number of problems that required central intervention.
Original languageEnglish
JournalJournal of Management Accounting Research
Volume32
Issue number2
Pages (from-to)137–157
Number of pages21
ISSN1049-2127
DOIs
Publication statusPublished - Sept 2020

Keywords

  • Incentives
  • Transfer prices
  • Quasi-market
  • Organizational design

Cite this