DP3833 Export Pricing of Foreign Firms in Hungary: Estimations for 1992-96

Author(s): László Halpern , Miklós Koren

Publication Date: March 2003

Keyword(s): transfer pricing , export pricing , foreign firms

JEL(s): D21 , F23 , F41 , L13

Programme Areas: Transition Economics

Link to this Page: www.cepr.org/pubs/dps/DP3833.asp

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.