Game Theory and Institutional Entrepreneurship: Transfer Pricing and the Search for Coordination International Tax Policy

Coordination in international tax policy is extremely problematic. Economists and political scientists have explained this lack of coordination by arguing that tax competition triggers a prisoner's dilemma. In this article I argue that not all international tax policy can be reduced to the prisoner's dilemma syndrome. Transfer pricing policy, the object of this study, can be modeled as a coordination game. By drawing upon game theory and new institutional analysis, I argue that institutional entrepreneurs who decide to play their favorite option first can facilitate the emergence of international policy coordination. This idea is examined in the context of the creation of the new Organization for Economic Cooperation and Development rules on transfer pricing. The conclusion is that coordination emerges in transfer pricing policy through a process of conflictual institutionalization.