Abstract
When multinationals face lower tax rates abroad than in the US, transfer pricing strategies generate an asymmetry in the tax rates on a project's profits and losses. We show that the tax savings from transfer pricing can be expressed as a long position in a call option. We use a model to show that this transfer pricing call option leads a firm to choose riskier and larger projects than it would otherwise. Thus, transfer pricing strategies do not simply reduce a firm's taxes, they can influence the scale and types of projects undertaken.
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