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Asymmetric Taxation and Performance-Based Incentive Contracts

  • Rainer Niemann
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    This paper analyzes the effects of symmetric and asymmetric taxation on performance-based versus fixed remuneration contracts. I integrate a proportional corporation tax and a proportional wage tax into a binary principal-agent model. The wage tax increases the remuneration costs and makes the agent's employment less attractive. Thus, the principal tends to demand lower rather than higher effort or does not offer a contract at all. In contrast to the wage tax, the corporate tax is irrelevant for the optimal remuneration contract. Under asymmetric corporate taxation, the principal tends to offer contracts less frequently. Fixed remuneration contracts are penalized more heavily by asymmetric taxation than performance-based remuneration contracts.

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    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3363.

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    Date of creation: 2011
    Date of revision:
    Handle: RePEc:ces:ceswps:_3363
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    1. 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.
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    7. Ahsan, Syed M, 1974. "Progression and Risk-Taking," Oxford Economic Papers, Oxford University Press, vol. 26(3), pages 318-28, November.
    8. Eeckhoudt, Louis & Hansen, Pierre, 1982. "Uncertainty and the partial loss offset provision," Economics Letters, Elsevier, vol. 9(1), pages 31-35.
    9. Brunello, Giorgio & Comi, Simona & Sonedda, Daniela, 2006. "Income Taxes and the Composition of Pay," IZA Discussion Papers 2203, Institute for the Study of Labor (IZA).
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    11. Christelle Viauroux & Barnali Gupta, 2009. "Is Tax sharing Optimal? An Analysis in a Principal-Agent Framework," UMBC Economics Department Working Papers 09-105, UMBC Department of Economics.
    12. Paolo M. Panteghini, 2001. "Corporate Tax Asymmetries under Investment Irreversibility," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 58(3), pages 207-, July.
    13. Eeckhoudt, Louis & Gollier, Christian & Schlesinger, Harris, 1997. "The no-loss offset provision and the attitude towards risk of a risk-neutral firm," Journal of Public Economics, Elsevier, vol. 65(2), pages 207-217, August.
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    15. Mackie-Mason, Jeffrey K., 1990. "Some nonlinear tax effects on asset values and investment decisions under uncertainty," Journal of Public Economics, Elsevier, vol. 42(3), pages 301-327, August.
    16. Rainer Niemann, 2004. "Asymmetric Taxation and Cross-Border Investment Decisions," CESifo Working Paper Series 1219, CESifo Group Munich.
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