Research Details

Abstract

This paper studies transfer prices and compensation mechanisms in a principal-agent model with moral hazard and private information by the agent. Production requires unobservable effort by the agent and a purchased input. In general it is optimal for the principal to create an internal market for the input and charge the agent a tax or subsidy which differs from the market price. Conditions are found under which the optimal compensation function is given by the difference between a nonlinear "revenue" function depending only on output and a nonlinear transfer pricing function which depends only on the amount of the purchased input.

Type

Article

Author(s)

David Besanko

Date Published

1991

Citations

Besanko, David. 1991. Delegation and Transfer Pricing in a Principal-Agent model. International Economic Review.(1): 55-68.