Profit-Based Compensation and Corporate Tax Evasion
This paper attempts to analyze corporate tax evasion in a principal-agent framework. We assume that the firm's profit is positively related to managerial effort and that the executive compensation is profit-based. In addition, we consider the situation where the manager might underreport the firm's earnings to the shareholders or to the tax authorities and consume the unreported income as rent when the manager possesses private information regarding the firm's earnings. We show that, under these considerations, the production decision and tax evasion decision are not separable; moreover, the profit taxes are not neutral.
Volume (Year): 7 (2011)
Issue (Month): 2 (July)
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