AN ANALYSIS OF INFORMATION STRUCTURE AND OPTIMAL TRANSFER PRICING DECISION RULES FOR DECENTRALIZED FIRMS

Chapter II of this dissertation provides an introduction to the concepts of modern control theory. We develop a classical model of the firm and demonstrate how modern control theory techniques are applicable to the dynamic optimization problem of the firm. The transition from static optimization to dynamic optimization theory is accomplished by reviewing the discrete time minimum principle and applying this principle to the classical problem of profit maximization.;The solution of the decentralized control problem is presented in Chapter IV where we derive an optimal decentralized control policy for a general organizational team using the mathematical approach of dynamic programming and the results of team theory. This policy is then applied to our research problem to determine the effect of transfer pricing policy on the decentralized decision maker's actions. The main finding of this study under the stated conditions of the analysis is that the transfer price involved in the interdivisional exchange of goods or services does not affect the decentralized team decision maker's actions.;Chapter III introduces the concept of linear quadratic control and develops a decentralized model of the firm. We develop the concepts of decentralized information availability to formulate a well posed problem of decentralized control.