Effects of negotiator accountability, performance evaluation system, and perception of divisional power on transfer pricing negotiation outcomes

This study empirically examines specific facets of the transfer pricing process in relation to negotiation behavior and outcomes between divisions of decentralized organizations. This study investigates the separate and combined effects of negotiator accountability to their constituents, the firm's performance evaluation system, and the perceived relative power of the negotiating divisions on negotiation behavior and outcomes.;An experiment was conducted in which participants of the same gender were organized into a dyadic transfer pricing negotiation setting, with one party representing the buying division and the other representing the selling division. In two repeated and identical negotiation sessions, joint agreements on standardized transfer pricing terms were negotiated between the two divisions. Prior to the sessions, specific negotiation strategies were formulated based on instructions from the experimenter and through participants' discussion with their division managers (played by two confederates). Balanced 2 x 2 x 2 analysis of variance and multivariate analysis of variance were subsequently used for data analysis.;Negotiation performance was analyzed using criteria such as average targeted profits, standardized aspiration levels, buyer profits, seller profits, joint profits, distances between final offers, and time required to reach agreements. Results showed that negotiators set lower profit goals, were more cooperative, had higher joint outcomes, and distances between their final offers were less when performance evaluation system was based on overall firm profits. Second, negotiators set higher average targeted profits, had higher aspiration levels when they were held accountable by their constituents. However, such higher aspiration levels did not have significant effects on negotiation outcomes. Third, negotiators representing the perceived stronger divisions did not have higher aspiration than those representing the perceived weaker divisions. Negotiation outcomes were not significantly influenced by perceived relative power. Finally, no significant interaction effect was found between accountability and performance evaluation system, and between accountability and perceived relative power.