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http://ssrn.com/abstract=1723907
 
 

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Incentive Effects of Bonus Taxes in a Principal-Agent Model


Helmut M. Dietl


University of Zurich - Department of Business Administration (IBW)

Martin Grossmann


University of Zurich

Markus Lang


University of Zurich - Department of Business Administration (IBW)

Simon Wey


University of Zurich - Department of Business Administration (IBW)

December 11, 2010

University of Zurich Institute for Strategy and Business Economics Working Paper No. 140

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.

Number of Pages in PDF File: 29

Keywords: Principal-agent model, bonus tax, executive compensation, incentive, pay regulation

JEL Classification: H24, J30, M52

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Date posted: December 12, 2010 ; Last revised: August 17, 2012

Suggested Citation

Dietl, Helmut M. and Grossmann, Martin and Lang, Markus and Wey, Simon, Incentive Effects of Bonus Taxes in a Principal-Agent Model (December 11, 2010). University of Zurich Institute for Strategy and Business Economics Working Paper No. 140. Available at SSRN: http://ssrn.com/abstract=1723907 or http://dx.doi.org/10.2139/ssrn.1723907

Contact Information

Helmut M. Dietl
University of Zurich - Department of Business Administration (IBW) ( email )
Hottingerstrasse 10
Plattenstrasse 14
Zurich, 8032
Switzerland
Martin Grossmann
University of Zurich ( email )
Plattenstrasse 14
CH-8032 Zürich, 8032
Switzerland
Markus Lang (Contact Author)
University of Zurich - Department of Business Administration (IBW) ( email )
Hottingerstrasse 10
Plattenstrasse 14
Zurich, 8032
Switzerland
Simon Wey
University of Zurich - Department of Business Administration (IBW) ( email )
Hottingerstrasse 10
Plattenstrasse 14
Zurich, 8032
Switzerland
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