The impact of control policies on the process and outcomes of negotiated transfer pricing

Laboratory evidence is provided concerning the effects of incentives and arbitration on the process and outcomes of negotiated transfer pricing. Two experiments were performed, one with high interdependence between the trading divisions, and the 2nd with low interdependence. The results indicate that under high interdependence, using either a firm-based incentive scheme or arbitration was superior to using both. Under low interdependence, using both led to a superior negotiating process, but the interactions were insignificant for the negotiation outcomes.