Transfer Pricing by U.S.-Based Multinational Firms∗

This paper examines how prices set by multinational firms vary across arm’s-length and related-party customers. We find that arm’s length prices are substantially and significantly higher than related party prices for U.S.-based multinational exporters. The price difference is large even when comparing the export of the same good by the same firm to the same destination country in the same month by the same mode of transport. The price wedge is smaller for commodities than for differentiated goods and is increasing in firm size and firm export share. The difference between arm’s length and related party prices is also significantly greater for goods sent to countries with lower taxes and higher tariffs. Changes in exchange rates have differential effects on arm’s length and related party prices; an appreciation of the dollar reduces the difference between the prices.