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Incentive Effects of Bonus Taxes in a Principal-Agent Model

Helmut Dietl, Martin Grossmann, Markus Lang () and Simon Wey ()
Additional contact information
Simon Wey: Institute for Strategy and Business Economics, University of Zurich

No 140, Working Papers from University of Zurich, Institute for Strategy and Business Economics (ISU)

Abstract: Several countries have implemented bonus taxes for corporate executives in response to the financial crisis of 2007-2010. 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. In addition, a bonus tax can induce the principal to pay higher bonuses even though the agent's effort always decreases.

Keywords: Principal-agent model; bonus tax; labor taxation; executive compensation; financial regulation (search for similar items in EconPapers)
JEL-codes: H24 J30 M52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-bec, nep-cmp, nep-cta and nep-pub
Date: 2010-12, Revised 2012-02
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http://repec.business.uzh.ch/RePEc/iso/ISU_WPS/140_ISU_full.pdf (application/pdf)

Related works:
Journal Article: Incentive effects of bonus taxes in a principal-agent model (2013) Downloads
Working Paper: Incentive Effects of Bonus Taxes in a Principal-Agent Model (2012) Downloads
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