Abstract
This study introduces a model of a firm consisting of two interacting divisions with capacity constraints that are private information. The model takes place in a setting in which the capacity of each division is known only to the division manager. Under this setting, top management can monitor only those parameters that are documented and not the actual state of the divisions. The paper shows that under fairly realistic assumptions, a simple transfer-pricing mechanism may achieve the best outcome in the sense of truth revealing and making optimal decisions.
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