Incentive effects of bonus taxes in a principal-agent model

Helmut Dietl, Martin Grossmann, Markus Lang and Simon Wey

Journal of Economic Behavior & Organization, 2013, vol. 89, issue C, 93-104

Abstract: Several countries have implemented bonus taxes for corporate executives in response to the current financial crisis. 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 if the agent is highly risk averse. Additionally, a bonus tax can induce the principal to pay higher bonuses even though the agent's effort unambiguously decreases. Nevertheless, a bonus tax reduces the overall salary of the agent. Further results are derived with respect to the existence and uniqueness of the equilibrium for a general effort cost function.

Keywords: Principal-agent model; Bonus tax; Executive compensation; Incentive pay; Pay regulation (search for similar items in EconPapers)
JEL-codes: H24 J30 M52 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0167268113000218
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Incentive Effects of Bonus Taxes in a Principal-Agent Model (2012)
Working Paper: Incentive Effects of Bonus Taxes in a Principal-Agent Model (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:89:y:2013:i:c:p:93-104

DOI: 10.1016/j.jebo.2013.02.002

Access Statistics for this article

Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

More articles in Journal of Economic Behavior & Organization from Elsevier
Bibliographic data for series maintained by Catherine Liu ().