Working Paper: CEPR ID: DP3833
Authors: László Halpern; Miklós Koren
Abstract: The Paper investigates how foreign-owned and domestic firms in Hungary set their export prices. Using a unique dataset with firm and product-level data on trade flows, we find that foreign firms charge substantially lower export prices than domestic firms. This finding is robust after controlling for relevant firm characteristics, indicating that the pricing behaviour of foreign firms is different. One explanation is that multinational firms engage in transfer pricing to minimize tax burden. We provide evidence that tax incentives explain a large portion of the price gap; the export prices of tax-paying foreign firms are 15 to 35% lower than arm’s length prices.
Keywords: export pricing; foreign firms; transfer pricing
JEL Codes: D21; F23; F41; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| foreign firms (F23) | lower export prices (F14) |
| tax incentives (H20) | lower export prices (F14) |
| transfer pricing practices (F16) | lower export prices (F14) |
| foreign firms (F23) | less elastic export demand (F14) |
| less elastic export demand (F14) | lower export prices (F14) |
| firm characteristics (size, market share) (L25) | pricing behavior (D40) |