The effect of tax policy uncertainty on incentivization, managerial effort and total surplus

Alexandra Spaeth ()
Additional contact information
Alexandra Spaeth: Former member of the Institute of Company Taxation and Tax Theory

Journal of Business Economics, 2025, vol. 95, issue 6, No 3, 839-869

Abstract: Abstract This paper examines the effect of tax policy uncertainty on incentivization and managerial effort in an agency model with risk-averse principal and agent. If the agent’s effort is unobservable, the agent’s variable share of profit acts as a risk-sharing and incentivizing instrument. Then, a countercyclical tax base policy at the agent level or a procyclical policy at the principal level can increase the agent’s variable share of profit, whose increase in turn increases the agent’s effort. This theoretical finding favors a procyclical tax policy at the company level (principal) and a countercyclical one at the employee level (agent). Tax policy uncertainty in the sense of tax base risk makes this increase in effort possible and strengthens effects. Additionally, under a countercyclical tax base policy at the agent level, tax base risk at the agent level up to a certain level increases overall utility and thus total surplus.

Keywords: Agency model; Tax base risk; Tax policy uncertainty; Procyclical; Countercyclical (search for similar items in EconPapers)
JEL-codes: D86 H21 M52 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11573-025-01227-w Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
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:spr:jbecon:v:95:y:2025:i:6:d:10.1007_s11573-025-01227-w

Ordering information: This journal article can be ordered from
http://www.springer.com/journal/11573

DOI: 10.1007/s11573-025-01227-w

Access Statistics for this article

Journal of Business Economics is currently edited by Günter Fandel

More articles in Journal of Business Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().