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Incentive effects of bonus taxes in a principal-agent model


Dietl, Helmut; Grossmann, Martin; Lang, Markus; Wey, Simon (2012). Incentive effects of bonus taxes in a principal-agent model. UZH Business Working Paper Series 313, University of Zurich.

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.

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.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Language:English
Date:2012
Deposited On:23 Aug 2019 12:30
Last Modified:28 Oct 2019 08:29
Series Name:UZH Business Working Paper Series
Number of Pages:29
ISSN:2296-0422
OA Status:Green
Other Identification Number:merlin-id:8052

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