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 -