Moral Hazard, Limited Liability and Taxation: A Principal-Agent Model

Anindya Banerjee and Timothy Besley

Oxford Economic Papers, 1990, vol. 42, issue 1, 46-60

Abstract: This paper uses a model of managers' behavior under uncertainty to analyze the effects of limited liability of optimal profits taxes. In particular, it addresses the question of whether the benefits of limited liability should be taxed. The authors show that an increase in profits taxation yields a welfare improvement under limited liability. Hence, the existence of limited liability provides an argument for engaging in corrective taxation over and above that implied by market incompleteness. Copyright 1990 by Royal Economic Society.

Date: 1990
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