Influence of Ethical Position and Information Asymmetry on Transfer Price Negotiations

Abstract

This study examines the potential effect of ethical position (EP) on negotiation strategies and behaviors in an intra-firm setting. We demonstrate that EP moderates the relationship between information asymmetry and the initial transfer price during negotiations for individuals who are morally situational. Graduate business students participated in an experiment that randomized the level of information they could use in determining their initial asking price and their reservation price in a negotiation. This manipulation allows us to examine managements' negotiation behavior when making an ethical judgment. Further, we relate their transfer price position to their EP that consists of two orthogonal factors, relativism and idealism. We find that access to the opposing division's private information does not influence the initial transfer price position of those who are relatively idealistic. Contrary to our hypothesis, these results suggest that during transfer price negotiations, those who are more relativistic will have a smaller initial transfer price dispersion than those who are relatively idealistic. This study provides evidence that EP plays an important role in transfer price negotiation behaviors.