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Incentive effects of bonus taxes in a principal-agent model


Dietl, Helmut; Grossmann, Martin; Lang, Markus; Wey, Simon (2013). Incentive effects of bonus taxes in a principal-agent model. Journal of Economic Behavior & Organization, 89:93-104.

Abstract

Several countries have implemented bonus taxes for corporate executives in response to the current financial crisis. 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 if the agent is highly risk averse. Additionally, a bonus tax can induce the principal to pay higher bonuses even though the agent's effort unambiguously decreases. Nevertheless, a bonus tax reduces the overall salary of the agent. Further results are derived with respect to the existence and uniqueness of the equilibrium for a general effort cost function.

Abstract

Several countries have implemented bonus taxes for corporate executives in response to the current financial crisis. 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 if the agent is highly risk averse. Additionally, a bonus tax can induce the principal to pay higher bonuses even though the agent's effort unambiguously decreases. Nevertheless, a bonus tax reduces the overall salary of the agent. Further results are derived with respect to the existence and uniqueness of the equilibrium for a general effort cost function.

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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:2013
Deposited On:15 Jan 2014 08:15
Last Modified:16 Feb 2018 18:58
Publisher:Elsevier
ISSN:0167-2681
OA Status:Closed
Free access at:Related URL. An embargo period may apply.
Publisher DOI:https://doi.org/10.1016/j.jebo.2013.02.002
Related URLs:http://ssrn.com/abstract=1723907
Other Identification Number:merlin-id:8872

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