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Taxation and Regulation of Bonus Pay

  • Besley, Timothy J.
  • Ghatak, Maitreesh

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 risk-taking 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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8532.

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Date of creation: Aug 2011
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Handle: RePEc:cpr:ceprdp:8532
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References listed on IDEAS
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  1. Palomino, Frédéric & Prat, Andrea, 1999. "Risk Taking and Optimal Contracts for Money Managers," CEPR Discussion Papers 2066, C.E.P.R. Discussion Papers.
  2. John Thanassoulis, 2011. "Bankers' Pay Structure And Risk," Economics Series Working Papers 545, University of Oxford, Department of Economics.
  3. Bruno Biais & Catherine Casamatta, 1999. "Optimal Leverage and Aggregate Investment," Journal of Finance, American Finance Association, vol. 54(4), pages 1291-1323, 08.
  4. Doina Maria Radulescu, 2010. "The Effects of a Bonus Tax on Manager Compensation and Welfare," CESifo Working Paper Series 3030, CESifo Group Munich.
  5. Hendrik Hakenes & Isabel Schnabel, 2014. "Bank Bonuses and Bailouts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(s1), pages 259-288, 02.
  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. John Thanassoulis, 2011. "The Case For Intervening In Bankers' Pay," Economics Series Working Papers 532, University of Oxford, Department of Economics.
  8. Kose John & Anthony Saunders & Lemma W. Senbet, 1998. "A Theory of Bank Regulation and Management Compensation," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-043, New York University, Leonard N. Stern School of Business-.
  9. 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.
  10. Patrick Bolton & Hamid Mehran & Joel Shapiro, 2010. "Executive compensation and risk taking," Staff Reports 456, Federal Reserve Bank of New York.
  11. repec:dgr:kubcen:1998108 is not listed on IDEAS
  12. Brian Bell, 2010. "Bankers' bonuses," LSE Research Online Documents on Economics 57934, London School of Economics and Political Science, LSE Library.
  13. 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.
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