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Moral Hazard, Limited Liability and Taxation: A Principal-Agent Model

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  • Banerjee, Anindya
  • Besley, Timothy

Abstract

This paper uses a model of managers' behavior under uncertainty to analyze the effects of limited liability of optimal profits taxes. In particular, it addresses the question of whether the benefits of limited liability should be taxed. The authors show that an increase in profits taxation yields a welfare improvement under limited liability. Hence, the existence of limited liability provides an argument for engaging in corrective taxation over and above that implied by market incompleteness. Copyright 1990 by Royal Economic Society.

Suggested Citation

  • 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.
  • Handle: RePEc:oup:oxecpp:v:42:y:1990:i:1:p:46-60
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    Cited by:

    1. 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.
    2. Tri Vi Dang & Florian Morath, 2013. "The Taxation of Bilateral Trade with Endogenous Information," Working Papers tax-mpg-rps-2013-07, Max Planck Institute for Tax Law and Public Finance.
    3. Rainer Niemann, 2011. "Asymmetric Taxation and Performance-Based Incentive Contracts," CESifo Working Paper Series 3363, CESifo Group Munich.
    4. Meißner, Fabian & Schneider, Georg & Sureth, Caren, 2013. "The impact of corporate taxes and flexibility on entrepreneurial decisions with moral hazard and simultaneous firm and personal level taxation," arqus Discussion Papers in Quantitative Tax Research 141, arqus - Arbeitskreis Quantitative Steuerlehre.
    5. Ralf Ewert & Rainer Niemann, 2010. "Limited Liability, Asymmetric Taxation, and Risk Taking - Why Partial Tax Neutralities can be Harmful," CESifo Working Paper Series 3301, CESifo Group Munich.
    6. Niemann, Rainer, 2007. "Risikoübernahme, Arbeitsanreiz und differenzierende Besteuerung," arqus Discussion Papers in Quantitative Tax Research 28, arqus - Arbeitskreis Quantitative Steuerlehre.

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