Labor-Management Bargaining and Transfer Pricing in Multinational Corporations

This paper studies transfer pricing and its relation with the determination of wages and employment when a subsidiary of the multinational corporation (MNC) is located in a unionized labor market. We show that the union prefers to negotiate with headquarters rather than with the subsidiary, while the MNC prefers the opposite because the MNC can use transfer pricing as a bargaining tool in decentralized labor-management negotiations. Thus, the MNC charges the transfer price differently for the unionized subsidiary than for the profit-maximizing subsidiary. The specific level of the transfer price depends on four factors: (i) the order of moves--whether headquarters can commit to a transfer price before the labor-management negotiations take place; (ii) the form of negotiations--whether headquarters or the subsidiary bargain with the union; (iii) union preference; and (iv) corporate tax rates