We consider a multi-division firm engaged in several independent projects. Each project involves several but not all divisions, and division may be involved in more than one project. We find that there exists an efficient transfer-pricing mechanism that is incentive-compatible via dominant strategies, and balanced. Furthermore, the mechanism could be set up so that the expected payoff of every division manager is a predetermined proportion of the total expected profits from the projects of his division.
Keywords: Transfer Pricing, Mechanism Design, Decentralization,
Capacity.
Classification: C69, C79, D81, D82, L22, M11.
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