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).
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
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)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Thanassoulis John, 2009. "Now Is the Right Time to Regulate Bankers' Pay," The Economists' Voice, De Gruyter, vol. 6(5), pages 1-4, April.
- Anthony M. Marino & Ján Zábojník, 2008.
"Work-related perks, agency problems, and optimal incentive contracts,"
RAND Journal of Economics,
RAND Corporation, vol. 39(2), pages 565-585.
- Anthony Marino & Jan Zabojnik, 2006. "Work-Related Perks, Agency Problems, and Optimal Incentive Contracts," Working Papers 1107, Queen's University, Department of Economics.
- Bengt Holmstrom, 1979.
"Moral Hazard and Observability,"
Bell Journal of Economics,
The RAND Corporation, vol. 10(1), pages 74-91, Spring.
- Helmut Dietl & Martin Grossmann & Markus Lang & Simon Wey, 2010.
"Incentive Effects of Bonus Taxes in a Principal-Agent Model,"
0140, University of Zurich, Institute for Strategy and Business Economics (ISU), revised Feb 2012.
- 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).
- Bengt Holmstrom, 1982.
"Moral Hazard in Teams,"
Bell Journal of Economics,
The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
- 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.
- 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.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (IBW IT).
If references are entirely missing, you can add them using this form.