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Incentive Effects of Bonus Taxes in a Principal-Agent Model

  • Helmut M. Dietl


    (Department of Business Administration (IBW), University of Zurich)

  • Martin Grossmann


    (Department of Business Administration (IBW), University of Zurich)

  • Markus Lang


    (Department of Business Administration (IBW), University of Zurich)

  • Simon Wey


    (Department of Business Administration (IBW), University of Zurich)

Several countries have implemented bonus taxes for corporate executives in response to the financial crisis of 2007-2010. Using a principal-agent model, this paper investigates the incentive effects of bonus taxes by analyzing the agent's and principal's behavior. Specifically, we show how bonus taxes affect the agent's incentives to exert effort and the principal's decision regarding the composition of the compensation package (fixed salary and bonus rate). We find that, surprisingly, a bonus tax can increase the bonus rate and decrease the fixed salary. In addition, a bonus tax can induce the principal to pay higher bonuses even though the agent's effort always decreases.

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Paper provided by University of Zurich, Department of Business Administration (IBW) in its series Working Papers with number 313.

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Length: 30 pages
Date of creation: Aug 2012
Date of revision:
Handle: RePEc:zrh:wpaper:313
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