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Why Taxing Executives' Bonuses Can Foster Risk-Taking Behavior

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Author Info

  • Martin Grossmann

    ()
    (Department of Business Administration, University of Zurich)

  • Markus Lang

    ()
    (Department of Business Administration, University of Zurich)

  • Helmut Dietl

    ()
    (Department of Business Administration, University of Zurich)

Abstract

Bonus taxes have been implemented to prevent managers from taking excessive risks. This paper analyzes the effects of taxing executives' bonuses in a principal--agent model. Our model shows that, contrary to its intention, the introduction of a bonus tax intensifies managers' risk-taking behavior and decreases their effort. The principal responds to a bonus tax by offering the manager a higher fixed salary but a lower incentive-based component (bonus rate).

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File URL: http://repec.business.uzh.ch/RePEc/iso/ISU_WPS/150_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 0150.

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Length: 26 pages
Date of creation: Oct 2011
Date of revision: May 2012
Handle: RePEc:iso:wpaper:0150

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Related research

Keywords: Principal-agent model; bonus tax; risk-taking; executive compensation; financial regulation;

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References

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  1. 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.
  2. Anthony Marino & Jan Zabojnik, 2006. "Work-Related Perks, Agency Problems, and Optimal Incentive Contracts," Working Papers 1107, Queen's University, Department of Economics.
  3. HOLMSTROM, Bengt, . "Moral hazard and observability," CORE Discussion Papers RP -379, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Michael Faulkender & Dalida Kadyrzhanova & N. Prabhala & Lemma Senbet, 2010. "Executive Compensation: An Overview of Research on Corporate Practices and Proposed Reforms," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 107-118.
  5. Bengt Holmstrom, 1981. "Moral Hazard in Teams," Discussion Papers 471, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. James A. Mirrlees, 1976. "The Optimal Structure of Incentives and Authority Within an Organization," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 105-131, Spring.
  7. Thanassoulis John, 2009. "Now Is the Right Time to Regulate Bankers' Pay," The Economists' Voice, De Gruyter, vol. 6(5), pages 1-4, April.
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Cited by:
  1. Hilmer, Michael, 2013. "Fiscal treatment of managerial compensation - a welfare analysis," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79703, Verein für Socialpolitik / German Economic Association.

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