The impact of social factors, negotiator role and compensation schemes on negotiated transfer prices: an experimental study

Yi Xuan Loy

Research output: ThesisDoctoral Thesis

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Abstract

This thesis examines the impact of social factors (such as the social network environment and trust reciprocity) and an economic factor (the type of compensation scheme) on managers’ negotiated transfer pricing decisions. Drawing on theories from self-serving bias, social exchange, and reciprocity, two laboratory experiments were developed to test the hypotheses formulated for this thesis. In both experiments, participants assume the role of negotiating divisional managers (i.e. buying or selling managers).

Study One aims to investigate: (1) the existence of a self-serving bias originally proposed by Luft & Libby (1997), (2) the impact of the social network environment (i.e. supportive or non-supportive) on managers’ negotiated transfer pricing decisions, and (3) the joint effect of the social network environment and compensation scheme (i.e. competitive or cooperative) on managers’ negotiated transfer pricing decisions in a single-period setting. Results show the existence of a self-serving bias and suggest that the social network environment significantly influences managers’ perceptions of negotiated transfer pricing outcomes, both independently, and interactively with the type of compensation scheme.

Study Two extends Study One by: (1) extending the research setting into a multi-period setting and (2) examining the effect of trust reciprocity (i.e. absent or present) on managers’ negotiated transfer pricing decisions. Results find the self-serving bias effect to persist over multiple periods, and it can be inferred from the results that trust reciprocity builds over time and through repeated interactions with negotiating partners. This finding suggests that trust reciprocity provides a condition that allows managers to build trust-reciprocal relationships in negotiation.

Taken together, the findings of this thesis advance the negotiated transfer pricing literature (e.g. Chang et al. 2008; Ghosh 2000a, 2000b; Kachelmeier & Towry 2002; Luft & Libby 1997) with significant theoretical contributions and practical implications. First, results supports the theory that a self-serving bias exists in a single-period setting originally proposed and found in prior studies (e.g. Luft & Libby 1997; Chang et al. 2008; Kachelmeier & Towry 2002). Building on that, this thesis provides incremental contribution by extending the research setting into a multiple-period setting and finds such self-serving bias effects to persist over multiple-periods. Second, this thesis examines two internal social factors which have not been considered in the negotiated transfer pricing literature – the social network environment and trust reciprocity. Results suggest that when an environment supports social networking activities, selling managers are more likely to compromise with buying managers to the extent of accepting a price lower than the market price. Furthermore, it can be inferred from the findings of this thesis that trust reciprocity builds over time. Third, findings of this thesis advance both negotiated transfer pricing and compensation scheme literatures by providing insights into how managers’ negotiated transfer pricing decisions are influenced by the social network environment and types of compensation schemes. It adds to the literature by demonstrating how types of compensation schemes can affect managers’ decisions in a transfer pricing setting. From a practical perspective, the findings of this thesis suggest that top management should consider the use of policies that would cultivate an organisational culture which is supportive of social networking activities. In addition, the findings have implications for the design of compensation schemes that aim to achieve organisational goal congruence and overall organisational effectiveness.

Original languageEnglish
QualificationDoctor of Philosophy
Awarding Institution
  • The University of Western Australia
Award date28 Jun 2016
Publication statusUnpublished - 2016

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