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Abstract
I conduct three studies to explore: (1) various mechanisms a multinational enterprise (MNE) employs in utilizing transfer prices for tax avoidance and/or evasion; (2) How transfer prices are set strategically given the market structure and competition; (3) the effect(s) of transfer pricing regulation on multinational enterprises foreign direct investment (FDI) decision. The three chapters of my dissertation address each of these issues in turn. I use laboratory experiments, game theory, and empirical approaches to address these questions. The first chapter of my thesis uses an experiment to examine the process of setting transfer prices. I test both point predictions and comparative static predictions of models of optimal transfer pricing, comparing behavior under varying conditions, including wholly versus partially-owned subsidiaries and different tariff and tax rates. Additionally, I examine convergence and learning in this setting. In the second chapter, I develop a game theoretic model where the multinational enterprise establishes multiple divisions in a foreign market, then chooses its transfer pricing policy. I show that the transfer price set by the MNE is vastly different when they have multiple divisions compared to when they only have one division. The results show that the MNE can use transfer prices not only for tax avoidance, but also as a strategic device to increase profits. And finally in the third chapter, I use data on U.S. based multinational firms' reinvestment earnings abroad (provided by the BEA Survey of U.S. Direct Investment Abroad and the Balance of Payments Survey) as well as the level of transfer pricing regulation in the U.S. and host countries to trace the effect(s) of transfer pricing regulation on multinational firms' FDI decision.
