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Taxation and Regulation of Bonus Pay

  • Timothy Besley
  • Maitreesh Ghatak

We explore the consequence for taxation and regulation of bonus pay when investors are protected by taxpayers from downside risk. The paper develops a model where workers in financial sector firms make decisions about effort and risktaking which are influenced by the structure of bonus pay. Bailouts lead to too little effort, too much risk-taking and increase inequality. We show that the optimal structure of bonuses can be implemented by a combination of a regulation on the structure of bonuses and a tax on their level.

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File URL: http://sticerd.lse.ac.uk/dps/eopp/eopp30.pdf
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Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Economic Organisation and Public Policy Discussion Papers Series with number 030.

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Date of creation: Jul 2011
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Handle: RePEc:cep:stieop:030
Contact details of provider: Web page: http://sticerd.lse.ac.uk/_new/publications/default.asp

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  1. Patrick Bolton & Hamid Mehran & Joel Shapiro, 2010. "Executive compensation and risk taking," Staff Reports 456, Federal Reserve Bank of New York.
  2. Doina Radulescu, 2012. "The Effects of a Bonus Tax on Manager Compensation and Welfare," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 68(1), pages 1-16, March.
  3. John, Kose & Saunders, Anthony & Senbet, Lemma W, 2000. "A Theory of Bank Regulation and Management Compensation," Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 95-125.
  4. Hakenes, Hendrik & Schnabel, Isabel, 2012. "Bank Bonuses and Bail-outs," CEPR Discussion Papers 8852, C.E.P.R. Discussion Papers.
  5. Brian Bell, 2010. "Bankers' bonuses," LSE Research Online Documents on Economics 57934, London School of Economics and Political Science, LSE Library.
  6. Hirshleifer, David & Thakor, Anjan V, 1992. "Managerial Conservatism, Project Choice, and Debt," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 437-70.
  7. Ghatak, Maitreesh & Pandey, Priyanka, 2000. "Contract choice in agriculture with joint moral hazard in effort and risk," Journal of Development Economics, Elsevier, vol. 63(2), pages 303-326, December.
  8. Palomino, Frederic & Prat, Andrea, 2003. " Risk Taking and Optimal Contracts for Money Managers," RAND Journal of Economics, The RAND Corporation, vol. 34(1), pages 113-37, Spring.
  9. Bruno Biais & Catherine Casamatta, 1999. "Optimal Leverage and Aggregate Investment," Journal of Finance, American Finance Association, vol. 54(4), pages 1291-1323, 08.
  10. Coate, Stephen, 1995. "Altruism, the Samaritan's Dilemma, and Government Transfer Policy," American Economic Review, American Economic Association, vol. 85(1), pages 46-57, March.
  11. John Thanassoulis, 2011. "Bankers' Pay Structure And Risk," Economics Series Working Papers 545, University of Oxford, Department of Economics.
  12. John Thanassoulis, 2011. "The Case For Intervening In Bankers' Pay," Economics Series Working Papers 532, University of Oxford, Department of Economics.
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