Agency issues in multinational transfer pricing

This dissertation examines two agency relationships inherent in multinational transfer pricing. At the multinational firm level, the competing roles of tax minimization and performance evaluation complicate the selection of transfer price. At the economy level, the choice of tax transfer pricing regulations directly affects firm production decisions. In the internal agency conflict, firms use transfer prices to motivate and compensate divisional managers. In the external agency conflict, tax authorities establish transfer pricing regulations in an attempt to achieve an equitable split of income across jurisdictions.;The distinction between ex post and ex ante income shifting is an important theme in the dissertation. Despite transfer pricing regulations, firms may retain explicit discretion over the final tax transfer price. In ex post income shifting, firms use this discretion to minimize global taxes on realized income. Regulations linking tax transfer prices to a firm's production decisions induce it to distort input choices to manipulate the eventual tax transfer price. This is ex ante income shifting.;In the first essay, a subsidiary manager takes actions that affect a downstream division in a different tax jurisdiction. The transfer price determines both where the agent directs productive effort (ex ante role) and fixes the allocation of realized income across divisions. The firm can either set one transfer price, entangling the two roles, or set separate prices, risking regulatory intervention. Analysis shows that ex ante and ex post incentives interact in complex and counterintuitive ways.;The second essay shows that IRS transfer price regulations, by linking the allocation of income to cost and revenue realizations, induce firms to shift income ex ante by choosing inefficient inputs. The essay also examines the interaction between ex post and ex ante income shifting. In some cases, ex post discretion relieves ex ante distortions, suggesting that ex post shifting may not be a deleterious practice.;The third essay formally examines the notion that the "quality" of a transfer pricing rule is increasing in its verifiability. The essay uses two analytical approaches to show that varying verifiability has complex distributional consequences. Hence, one cannot rank transfer-pricing rules unambiguously in terms of verifiability.