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Fiscal treatment of managerial compensation - a welfare analysis

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  • Hilmer, Michael
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    Abstract

    We analyze the consequences of bonus taxes, limited deductibility of bonuses from company pro ts and a corporate income tax (CIT) in a principal-agent model and explore how these tax instruments a ffect managerial incentives and how they change the design of incentive contracts used in equilibrium. Introducing bonus taxes decreases the agent's net bonus and reduces eff ort. Limited deductibility has no such e ffects. In equilibrium both instruments lead to a lower eff ort incentivized by the principal with a lower bonus when bonuses are less deductible. We find that a bonus tax can lead to an increase in bonus payments. Moreover, the model explains the welfare eff ects and distributional implications of the actions named above. Limited deductibility and bonus taxes are close substitutes and lead to a welfare loss compared to a taxation by a CIT as the CIT neither has an eff ect on incentives nor on the incentive contract. Furthermore welfare can be increased by paying a subsidy for bonus payments. --

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    Bibliographic Info

    Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79703.

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    Date of creation: 2013
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    Handle: RePEc:zbw:vfsc13:79703

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    1. Lucian Arye Bebchuk & Jesse M. Fried, 2003. "Executive Compensation as an Agency Problem," NBER Working Papers 9813, National Bureau of Economic Research, Inc.
    2. Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, Elsevier, vol. 52(1), pages 45-67, October.
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    7. Lucian Arye Bebchuk & Jesse M. Fried & David I. Walker, 2002. "Managerial Power and Rent Extraction in the Design of Executive Compensation," NBER Working Papers 9068, National Bureau of Economic Research, Inc.
    8. Bebchuk, Lucian A. & Fried, Jesse M., 2003. "Executive Compensation as an Agency Problem," Berkeley Olin Program in Law & Economics, Working Paper Series, Berkeley Olin Program in Law & Economics qt81q3136r, Berkeley Olin Program in Law & Economics.
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    13. Banerjee, Anindya & Besley, Timothy, 1990. "Moral Hazard, Limited Liability and Taxation: A Principal-Agent Model," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 46-60, January.
    14. Doina Maria Radulescu, 2010. "The Effects of a Bonus Tax on Manager Compensation and Welfare," CESifo Working Paper Series 3030, CESifo Group Munich.
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    16. Park, Eun-Soo, 1995. "Incentive Contracting under Limited Liability," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 4(3), pages 477-90, Fall.
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