Why Taxing Executives' Bonuses Can Foster Risk-Taking Behavior

Martin Grossmann, Markus Lang and Helmut Dietl

Journal of Institutional and Theoretical Economics (JITE), 2016, vol. 172, issue 4, 645-664

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).

JEL-codes: H24 J30 M52 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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Working Paper: Why Taxing Executives' Bonuses Can Foster Risk-Taking Behavior (2012)
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DOI: 10.1628/093245616X14689190842778

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