Why Taxing Executives' Bonuses Can Foster Risk-Taking Behavior

Martin Grossmann, Markus Lang and Helmut Dietl

No 150, Working Papers from University of Zurich, Institute for Strategy and Business Economics (ISU)

Abstract: Bonus taxes have been implemented to prevent managers from taking excessive risks. This paper analyzes the effects of taxing executives' bonuses in a principal--agent model. Our model shows that, contrary to its intention, the introduction of a bonus tax intensifies managers' risk-taking behavior and decreases their effort. The principal responds to a bonus tax by offering the manager a higher fixed salary but a lower incentive-based component (bonus rate).

Keywords: Principal-agent model; bonus tax; risk-taking; executive compensation; financial regulation (search for similar items in EconPapers)
JEL-codes: H24 J30 M52 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2011-10, Revised 2012-05
New Economics Papers: this item is included in nep-acc, nep-bec, nep-cta, nep-hrm, nep-pub and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Journal Article: Why Taxing Executives' Bonuses Can Foster Risk-Taking Behavior (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:iso:wpaper:0150

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