Transfer Pricing: A Behavioral Context

THE accounting, management science,and economics literature containsnumerous models addressing the re-source allocation and transfer pricing prob-lems. Some of the earliest statements on the transfer pricing problem are recorded by Hirshleifer (1956 & 1957), Dean (1955), and Cook (1955). These authors suggest, solutions to the transfer pricing problem which reflect the analogy of the internal price problem to the determination of thd, (Competitive) market price of traditional economics. The advent of mathematical programming produced another stream of articles addressing the transfer price prob-! lem, especially after the relation between' a decentralized firm and the Dantzig and Wolfe (1960) decomposition principle was stated by Whinston (1964) and Baumol and Fabian (1964).i This paper represents an attempt to place the solutions proposed by the mathe-matical programming models as well as| other traditional solutions in an appropri-ate context. Since the transfer pricing problem only arises within a recognizable social system (be it an organization or a socialist economy) the paper considers the solutions in a social system context. ̂ The paradigm developed can then be used to evaluate the usefulness and limitations of the various proposed solutions