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The impact of corporate taxes and flexibility on entrepreneurial decisions with moral hazard and simultaneous firm and personal level taxation

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  • Meißner, Fabian
  • Schneider, Georg
  • Sureth, Caren
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    Abstract

    In this paper we investigate the incentive effects of corporate taxes in an agency setting with a principal facing an investment opportunity including an abandonment option. We are particularly interested in the interplay of taxation and the real option on the principal's incentives to motivate the agent to work hard. First, we extend the well-known studies on tax effects on decision making under uncertainty to moral hazard settings. In a benchmark case we find that, as confirmed in current literature, the corporate income tax has no incentive effect. If the principal accounts for the real option we show that paradoxical tax effects may occur. Also, with respect to the effect of the real option on the incentive problem we show that the option makes it less attractive for the principal to induce the agent to exert a high effort. --

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    Bibliographic Info

    Paper provided by arqus - Arbeitskreis Quantitative Steuerlehre in its series arqus Discussion Papers in Quantitative Tax Research with number 141.

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    Date of creation: 2013
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    Handle: RePEc:zbw:arqudp:141

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    Keywords: Tax Effects; Real Options; Moral Hazard; Investment Decisions;

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    19. Gries, Thomas & Prior, Ulrich & Sureth, Caren, 2007. "Taxation of risky investment and paradoxical investor behavior," arqus Discussion Papers in Quantitative Tax Research 26, arqus - Arbeitskreis Quantitative Steuerlehre.
    20. Niemann, Rainer & Sureth, Caren, 2004. "Tax neutrality under irreversibility and risk aversion," Economics Letters, Elsevier, vol. 84(1), pages 43-47, July.
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