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Why Taxing Executives' Bonuses Can Foster Risk-Taking Behavior

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  • Martin Grossmann
  • Markus Lang
  • Helmut Dietl

Abstract

Bonus taxes have been implemented to prevent managers from taking excessive risks. This paper analyzes the effects of taxing executives' bonuses in a principal-agent model. Our model shows that, contrary to its intention, the introduction of a bonus tax intensifies managers' risk-taking behavior and decreases their effort. The principal responds to a bonus tax by offering the manager a higher fixed salary but a lower incentive-based component (bonus rate).

Suggested Citation

  • 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.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201612)172:4_645:wtebcf_2.0.tx_2-c
    DOI: 10.1628/093245616X14689190842778
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    Citations

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    Cited by:

    1. Hilmer, Michael, 2014. "Too many to fail - How bonus taxation prevents gambling for bailouts," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100552, Verein für Socialpolitik / German Economic Association.
    2. 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.
    3. d’Andria, D. & Savin, I., 2018. "A Win-Win-Win? Motivating innovation in a knowledge economy with tax incentives," Technological Forecasting and Social Change, Elsevier, vol. 127(C), pages 38-56.
    4. Thomas Krabichler & Josef Teichmann, 2020. "Deep Replication of a Runoff Portfolio," Papers 2009.05034, arXiv.org.
    5. 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.
    6. Diego d'Andria & Ivan Savin, 2015. "Motivating innovation in a knowledge economy with tax incentives," Jena Economics Research Papers 2015-004, Friedrich-Schiller-University Jena.
    7. Hilmer, Michael, 2013. "Fiscal treatment of managerial compensation - a welfare analysis," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79703, Verein für Socialpolitik / German Economic Association.
    8. Melanie Steinhoff, 2015. "Management Compensation, Monitoring and Aggressive Corporate Tax Planning," CQE Working Papers 4115, Center for Quantitative Economics (CQE), University of Muenster.
    9. Steinhoff, Melanie, 2015. "Management compensation, monitoring and aggressive corporate tax planning," CAWM Discussion Papers 83, University of Münster, Münster Center for Economic Policy (MEP).
    10. Diego d'Andria, 2016. "Taxation and Incentives to Innovate: A Principal-Agent Approach," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 72(1), pages 96-123, March.

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    More about this item

    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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