Why Taxing Executives' Bonuses Can Foster Risk-Taking Behavior
AbstractBonus 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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Bibliographic InfoPaper provided by University of Zurich, Institute for Strategy and Business Economics (ISU) in its series Working Papers with number 0150.
Length: 26 pages
Date of creation: Oct 2011
Date of revision: May 2012
Principal-agent model; bonus tax; risk-taking; executive compensation; financial regulation;
Find related papers by JEL classification:
- 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-2011-11-07 (Accounting & Auditing)
- NEP-ALL-2011-11-07 (All new papers)
- NEP-BEC-2011-11-07 (Business Economics)
- NEP-CTA-2011-11-07 (Contract Theory & Applications)
- NEP-HRM-2011-11-07 (Human Capital & Human Resource Management)
- NEP-PUB-2011-11-07 (Public Finance)
- NEP-REG-2011-11-07 (Regulation)
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