 A study on the incentive compensation structure with payroll tax: A continuous-time principal-agent modelHuan Wang, Chong Lai and Shaoyong Lai The North American Journal of Economics and Finance, 2021, vol. 58, issue C Abstract: This paper studies a case when the government levies a payroll tax on the employee (agent) of an enterprise. We use a continuous-time principal-agent framework to analyze the impact of the tax on the employee’s working strategy and derive an incentive compensation scheme. The agent is supposed to be aware of his pre-tax and after-tax salary. Under the theory of behavioral economics, loss caused by taxation is taken into consideration. The Hamilton-Jacobi-Bellman (HJB) equation of principal’s profits is derived. By exploiting the HJB equation, we get several properties of the optimal contract. We also perform comparative statics to show our results. The model suggests that the agent’s utility loss enlarges as the tax rate increases. However, an increase in the tax rate does not always decrease principal’s profits. Keywords: Principal-agent model; Payroll tax; Incentive compensation; Utility loss (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:58:y:2021:i:c:s1062940821001091 DOI: 10.1016/j.najef.2021.101489 Access Statistics for this article The North American Journal of Economics and Finance is currently edited by Hamid Beladi More articles in The North American Journal of Economics and Finance from Elsevier |
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