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Why Taxing Executives' Bonuses Can Foster Risk-Taking Behavior


Dietl, Helmut; Grossmann, Martin; Lang, Markus (2016). Why Taxing Executives' Bonuses Can Foster Risk-Taking Behavior. Journal of Institutional and Theoretical Economics, 172(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).

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).

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Language:English
Date:2016
Deposited On:31 Jan 2017 15:33
Last Modified:02 Feb 2018 11:49
Publisher:Mohr Siebeck
ISSN:0932-4569
OA Status:Green
Publisher DOI:https://doi.org/10.1628/093245616X14689190842778
Related URLs:http://www.ingentaconnect.com/contentone/mohr/jite/2016/00000172/00000004/art00004 (Publisher)
Other Identification Number:merlin-id:14415

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