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The Effects of Differential Taxation on Managerial Effort and Risk Taking

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  • Rainer Niemann

Abstract

Differential taxation implies the existence of different tax rates or tax bases for different types of investments. We analyze the effects of differential taxation on managerial effort and risk taking in a moral-hazard model of the LEN type. The agent selects a portfolio of a high-risk and a low-risk project and chooses his effort level simultaneously. The principal anticipates the agent's choice and offers an incentive contract. A preferential tax base for the high-risk project induces a higher managerial effort and a higher optimal fraction of the high-risk project. A preferential tax rate increases or decreases the fraction of the high-risk project, depending on the agent's degree of risk aversion.

Suggested Citation

  • Rainer Niemann, 2008. "The Effects of Differential Taxation on Managerial Effort and Risk Taking," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 64(3), pages 273-310, September.
  • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200809)64:3_273:teodto_2.0.tx_2-2
    DOI: 10.1628/001522108X374142
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    References listed on IDEAS

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    1. Mark Bagnoli & Susan G. Watts, 2005. "Conservative Accounting Choices," Management Science, INFORMS, vol. 51(5), pages 786-801, May.
    2. Appelbaum, E. & Katz, E., 1988. "Portfolio diversification and taxation," Economics Letters, Elsevier, vol. 26(2), pages 189-195.
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    Cited by:

    1. Daniel Dreßler & Michael Overesch, 2013. "Investment impact of tax loss treatment—empirical insights from a panel of multinationals," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(3), pages 513-543, June.
    2. Krenn, Peter, 2015. "The impact of taxes on competition for CEOs," arqus Discussion Papers in Quantitative Tax Research 190, arqus - Arbeitskreis Quantitative Steuerlehre.
    3. Voßmerbäumer, Jan, 2012. "Effizienzwirkungen einer Regulierung von Managergehältern durch das Steuerrecht," arqus Discussion Papers in Quantitative Tax Research 125, arqus - Arbeitskreis Quantitative Steuerlehre.
    4. Ewert, Ralf & Niemann, Reiner, 2012. "Steuern in Agency-Modellen: Mehrperioden- und Multi-Task-Strukturen," arqus Discussion Papers in Quantitative Tax Research 135, arqus - Arbeitskreis Quantitative Steuerlehre.
    5. repec:spr:busres:v:11:y:2018:i:1:d:10.1007_s40685-017-0054-y is not listed on IDEAS

    More about this item

    Keywords

    differential taxation; principal-agent model; managerial effort; risk taking;

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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