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Incentive effects of bonus taxes in a principal-agent model

Author

Listed:
  • Dietl, Helmut M.
  • Grossmann, Martin
  • Lang, Markus
  • Wey, Simon

Abstract

Several countries have implemented bonus taxes for corporate executives in response to the current financial crisis. Using a principal-agent model, this paper investigates the incentive effects of bonus taxes by analyzing the agent's and principal's behavior. Specifically, we show how bonus taxes affect the agent's incentives to exert effort and the principal's decision regarding the composition of the compensation package (fixed salary and bonus rate). We find that, surprisingly, a bonus tax can increase the bonus rate and decrease the fixed salary if the agent is highly risk averse. Additionally, a bonus tax can induce the principal to pay higher bonuses even though the agent's effort unambiguously decreases. Nevertheless, a bonus tax reduces the overall salary of the agent. Further results are derived with respect to the existence and uniqueness of the equilibrium for a general effort cost function.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:jeborg:v:89:y:2013:i:c:p:93-104
    DOI: 10.1016/j.jebo.2013.02.002
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    References listed on IDEAS

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    Cited by:

    1. Hilmer, Michael, 2014. "Too many to fail - How bonus taxation prevents gambling for bailouts," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100552, Verein für Socialpolitik / German Economic Association.
    2. Michael Hilmer, 2014. "Bailouts, Bonuses and Bankers' Short-Termism," Working Papers tax-mpg-rps-2014-17, Max Planck Institute for Tax Law and Public Finance.
    3. Michael Hilmer, 2014. "Too Many to Fail - How Bonus Taxation Prevents Gambling for Bailouts," Working Papers tax-mpg-rps-2014-18, Max Planck Institute for Tax Law and Public Finance.
    4. Diego d'Andria & Ivan Savin, 2015. "Motivating innovation in a knowledge economy with tax incentives," Jena Economic Research Papers 2015-004, Friedrich-Schiller-University Jena.
    5. repec:mhr:jinste:urn:sici:0932-4569(201612)172:4_645:wtebcf_2.0.tx_2-c is not listed on IDEAS
    6. 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.
    7. repec:spr:busres:v:11:y:2018:i:1:d:10.1007_s40685-017-0054-y is not listed on IDEAS
    8. Gietl, Daniel & Haufler, Andreas, 2016. "Bonus Taxes and International Competition for Bank Managers," Annual Conference 2016 (Augsburg): Demographic Change 145615, Verein für Socialpolitik / German Economic Association.
    9. Martin Grossmann & Markus Lang & Helmut Dietl, 2016. "Why Taxing Executives' Bonuses Can Foster Risk-Taking Behavior," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 172(4), pages 645-664, December.
    10. repec:eee:tefoso:v:127:y:2018:i:c:p:38-56 is not listed on IDEAS
    11. Minhat, Marizah & Abdullah, Mazni, 2016. "Bankers’ stock options, risk-taking and the financial crisis," Journal of Financial Stability, Elsevier, vol. 22(C), pages 121-128.

    More about this item

    Keywords

    Principal-agent model; Bonus tax; Executive compensation; Incentive pay; Pay regulation;

    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 - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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