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Bailouts and the Optimal Taxation of Bonus Pay

Timothy Besley () and Maitreesh Ghatak ()

American Economic Review, 2013, vol. 103, issue 3, 163-67

Abstract: This paper argues that the possibility of bailouts to financial intermediaries distorts the supply price of capital and creates an argument for taxing financial bonuses separately from other sources of income. We develop a model of financial contracting where intermediaries compete for workers whose actions affect productivity and risk-taking in the financial sector. This derives the second-best optimum and market equilibrium. The optimal taxes that we propose increase both equity and efficiency compared to the pure market outcome.

JEL-codes: H21 H24 J33 (search for similar items in EconPapers)
Date: 2013
Note: DOI: 10.1257/aer.103.3.163
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Handle: RePEc:aea:aecrev:v:103:y:2013:i:3:p:163-67