Barnes, 45, has been unveiled by Rovers will be assisted by former Liverpool team-mate and ex-Tranmere midfielder Jason McAteer.
Barnes, who has signed a two-year contract, and McAteer both live locally on the Wirral.
"Tranmere was always a club I admired," said Barnes.
"I was really impressed with the work Tranmere did in the community. I know they're a strong family club and the work the players do reminds me of my days at Watford.
"I always felt it would be a fantastic place to come and work. I am local, and Jason is even more local than me."