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Incentive Effects of Bonus Taxes in a Principal-Agent ModelHelmut M. DietlUniversity of Zurich - Department of Business Administration (IBW) Martin GrossmannUniversity of Zurich Markus LangUniversity of Zurich - Department of Business Administration (IBW) Simon WeyUniversity 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 working papers seriesDate posted: December 12, 2010 ; Last revised: August 17, 2012Suggested CitationContact Information
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