Internal markets or hierachies: Transfer prices or budgets?
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Internal markets or hierachies : Transfer prices or budgets? / Pfeiffer, Thomas; Wagner, Joachim.
In: Journal of Economics and Business, Vol. 59, No. 3, 01.05.2007, p. 241-255.Research output: Journal contributions › Journal articles › Research › peer-review
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TY - JOUR
T1 - Internal markets or hierachies
T2 - Transfer prices or budgets?
AU - Pfeiffer, Thomas
AU - Wagner, Joachim
PY - 2007/5/1
Y1 - 2007/5/1
N2 - Since decades existing literature has pointed to the effectiveness of transfer prices compared to budgets in enabling decentralized decisions. We attest to the relative performance of these mechanisms by analyzing them in a standard incomplete contracting model. This allows to characterize how both mechanisms provide ex ante investment and ex post intra-firm trade incentives. We show that budgets dominate over prices if there is a strong positive complementarity between the outside markets measured in terms of the linear regression beta factor. This complementarity is an important factor whether a firm should establish an internal market or a hierarchy to coordinate decentralized decisions.
AB - Since decades existing literature has pointed to the effectiveness of transfer prices compared to budgets in enabling decentralized decisions. We attest to the relative performance of these mechanisms by analyzing them in a standard incomplete contracting model. This allows to characterize how both mechanisms provide ex ante investment and ex post intra-firm trade incentives. We show that budgets dominate over prices if there is a strong positive complementarity between the outside markets measured in terms of the linear regression beta factor. This complementarity is an important factor whether a firm should establish an internal market or a hierarchy to coordinate decentralized decisions.
KW - Budgets
KW - Specific investments
KW - Transfer prices
KW - Economics
UR - http://www.scopus.com/inward/record.url?scp=33847050150&partnerID=8YFLogxK
U2 - 10.1016/j.jeconbus.2006.06.010
DO - 10.1016/j.jeconbus.2006.06.010
M3 - Journal articles
AN - SCOPUS:33847050150
VL - 59
SP - 241
EP - 255
JO - Journal of Economics and Business
JF - Journal of Economics and Business
SN - 0148-6195
IS - 3
ER -