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Incentive Effects of Bonus Taxes in a Principal-Agent Model

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  • Helmut Dietl

    ()
    (Institute for Strategy and Business Economics, University of Zurich)

  • Martin Grossmann

    ()
    (Institute for Strategy and Business Economics, University of Zurich)

  • Markus Lang

    ()
    (Institute for Strategy and Business Economics, University of Zurich)

  • Simon Wey

    ()
    (Institute for Strategy and Business Economics, University of Zurich)

Abstract

Several countries have implemented bonus taxes for corporate executives in response to the financial crisis of 2007-2010. Using a principal-agent model, this paper investigates the incentive effects of bonus taxes by analyzing the agent's and principal's behavior. Specifically, we show how bonus taxes affect the agent's incentives to exert effort and the principal's decision regarding the composition of the compensation package (fixed salary and bonus rate). We find that, surprisingly, a bonus tax can increase the bonus rate and decrease the fixed salary. In addition, a bonus tax can induce the principal to pay higher bonuses even though the agent's effort always decreases.

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File URL: http://repec.business.uzh.ch/RePEc/iso/ISU_WPS/140_ISU_full.pdf
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Bibliographic Info

Paper provided by University of Zurich, Institute for Strategy and Business Economics (ISU) in its series Working Papers with number 0140.

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Length: 29 pages
Date of creation: Dec 2010
Date of revision: Feb 2012
Handle: RePEc:iso:wpaper:0140

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Keywords: Principal-agent model; bonus tax; labor taxation; executive compensation; financial regulation;

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References

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Cited by:
  1. Martin Grossmann & Markus Lang & Helmut Dietl, 2011. "Why Taxing Executives' Bonuses Can Foster Risk-Taking Behavior," Working Papers 0150, University of Zurich, Institute for Strategy and Business Economics (ISU), revised May 2012.

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