Incentive Effects of Bonus Taxes in a Principal-Agent Model
AbstractSeveral 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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Bibliographic InfoPaper provided by University of Zurich, Institute for Strategy and Business Economics (ISU) in its series Working Papers with number 0140.
Length: 29 pages
Date of creation: Dec 2010
Date of revision: Feb 2012
Principal-agent model; bonus tax; labor taxation; executive compensation; financial regulation;
Other versions of this item:
- Dietl, Helmut M. & Grossmann, Martin & Lang, Markus & Wey, Simon, 2013. "Incentive effects of bonus taxes in a principal-agent model," Journal of Economic Behavior & Organization, Elsevier, vol. 89(C), pages 93-104.
- Helmut M. Dietl & Martin Grossmann & Markus Lang & Simon Wey, 2012. "Incentive Effects of Bonus Taxes in a Principal-Agent Model," Working Papers 313, University of Zurich, Department of Business Administration (IBW).
- H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
- J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
- M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
This paper has been announced in the following NEP Reports:
- NEP-ACC-2010-12-23 (Accounting & Auditing)
- NEP-ALL-2010-12-23 (All new papers)
- NEP-BEC-2010-12-23 (Business Economics)
- NEP-CMP-2010-12-23 (Computational Economics)
- NEP-CTA-2010-12-23 (Contract Theory & Applications)
- NEP-PUB-2010-12-23 (Public Finance)
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