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The Effects of Differential Taxation on Managerial Effort and Risk Taking

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Author Info
Rainer Niemann
Abstract

Differential taxation implies the existence of different tax rates or tax bases for different types of investments. We analyze the effects of differential taxation on managerial effort and risk taking in a moral-hazard model of the LEN type. The agent selects a portfolio of a high-risk and a low-risk project and chooses his effort level simultaneously. The principal anticipates the agent's choice and offers an incentive contract. A preferential tax base for the high-risk project induces a higher managerial effort and a higher optimal fraction of the high-risk project. A preferential tax rate increases or decreases the fraction of the high-risk project, depending on the agent's degree of risk aversion.

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Publisher Info
Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 64 (2008)
Issue (Month): 3 (September)
Pages: 273-310
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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200809)64:3_273:teodto_2.0.tx_2-2

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Related research
Keywords: differential taxation; principal-agent model; managerial effort; risk taking;

Find related papers by JEL classification:
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy

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