The effect of performance evaluation schemes on predicted transfer prices: Do leadership tone and perceived fairness concerns matter?

Abstract

This paper experimentally investigates two control mechanisms that firms can use to avoid negotiation conflicts in negotiated transfer pricing decisions: leadership tone and performance evaluation schemes. When division managers are evaluated using a competitive performance evaluation scheme, a supportive leadership tone leads to a higher likelihood that divisions will settle on a transfer price close to the equal-profit transfer price. In contrast, when division managers are evaluated using a cooperative performance evaluation scheme, leadership tone does not significantly affect the likelihood that divisions settle on an equal-profit transfer price. These results demonstrate that firms, maintaining individual performance evaluations in a decentralized company structure, can use an informal control such as leadership tone to manage negotiation conflicts.

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