THE ECONOMICS OF DECOMPOSITION: RESOURCE ALLOCATION VS TRANSFER PRICING

Two distinctively different decomposition algorithms have been developed. Both are analagous to decentralized decision making in the firm. One essentially deals with the allocation of corporate resources by the use of transfer prices charged to the divisions, while the other deals with the direct allocation of fixed quantities of the corporate resources to each division. The analogy of a price coordinated, or transfer pricing, technique to decentralization was developed by Baumol and Fabian [1] and later by Kim [4]. The second approach to decomposition was developed by Kornai and Liptak [5] [6] in an attempt to formulate the planning problem in a Socialist economy. It is the purpose of this paper to develop the analogy of the resource allocation decomposition to decentralized decision making.