Internal Carbon Pricing in the Multidivisional Firm [ Online version ]

with Bernard Sinclair-Desgagné

R&R at Environmental & Resource Economics.

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Nowadays, most large multidivisional businesses, multinational enterprises and global value chains hold their own ‘internal markets’, which they operate through so-called ‘transfer prices’. In response to environmental regulation and public pressure, many such firms are seeking to incorporate the cost of pollution in these transfer prices. Called internal carbon pricing, this emerging practice consists in charging an extra fee to each business unit based on its emissions. Modeling two vertically related subsidiaries located in different jurisdictions, we examine how such modified transfer prices would thereby convey regulations and public pressure, and consider the impact on each subsidiary’s production and emissions abatement. Transfer pricing is already a well-known common practice for fiscal optimization. We thus also show how the firm’s environmental strategy might now interact with fiscal compliance. Through transfer pricing, finally, a carbon fare in one jurisdiction can have an incidence on the other jurisdiction’s subsidiary; implications for environmental governance are discussed.

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Avoiding Adverse Specilization in Multitasking: An Experimental Test of Agency Theory Predictions

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Many firms simultaneously pursue short-term profitability and long-term objectives such as sustainability. Yet, their employees keep focusing on business-as-usual, neglecting the second objective for a lack of clear appraisal and rewards. This phenomenon - called adverse specialization - has employees concentrate on a strict subset of tasks while the firm would have them address the full set. One solution advanced in the theoretical literature is to implement proper contingent monitoring and clawbacks in order to align the employee’s behavior with the principal’s objectives. Using an experimental methodology, this study tests and finds evidence for implementing this scheme.