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Income Taxes and the Composition of Pay


  • Brunello, Giorgio

    () (University of Padova)

  • Comi, Simona

    () (University of Milan Bicocca)

  • Sonedda, Daniela

    () (University of Piemonte Orientale)


According to the standard principal-agent model, the optimal composition of pay should balance the provision of incentives with the individual demand for insurance. Do income taxes alter this balance? We show that the relative share of PRP on total pay is reduced by higher average taxes, and is affected in a complex way by higher marginal tax rates. Empirical evidence based on the British Household Panel Survey, which exploits the UK 1999 Tax Reform, supports the theoretical predictions of the tax-augmented principal-agent model.

Suggested Citation

  • 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).
  • Handle: RePEc:iza:izadps:dp2203

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    References listed on IDEAS

    1. Lockwood, Ben & Manning, Alan, 1993. "Wage setting and the tax system theory and evidence for the United Kingdom," Journal of Public Economics, Elsevier, vol. 52(1), pages 1-29, August.
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    Cited by:

    1. Rainer Niemann, 2011. "Asymmetric Taxation and Performance-Based Incentive Contracts," CESifo Working Paper Series 3363, CESifo Group Munich.
    2. Ewert, Ralf & Niemann, Reiner, 2012. "Steuern in Agency-Modellen: Mehrperioden- und Multi-Task-Strukturen," arqus Discussion Papers in Quantitative Tax Research 135, arqus - Arbeitskreis Quantitative Steuerlehre.

    More about this item


    performance related pay; income taxes;

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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