The Impact of Corporate Taxes and Flexibility on Entrepreneurial Decisions with Moral Hazard and Simultaneous Firm and Personal Level Taxation

Arqus Quantative Tax Research Discussion Paper No. 141

35 Pages Posted: 17 Feb 2013

See all articles by Fabian Meißner

Fabian Meißner

University of Paderborn

Georg Thomas Schneider

University of Graz

Caren Sureth-Sloane

Paderborn University; Vienna University of Economics and Business

Date Written: January 11, 2013

Abstract

In this paper we investigate the incentive effects of corporate taxes in an agency setting with a principal facing an investment opportunity including an abandonment option. We are particularly interested in the interplay of taxation and the real option on the principal’s incentives to motivate the agent to work hard. First, we extend the well-known studies on tax effects on decision making under uncertainty to moral hazard settings. In a benchmark case we find that, as confirmed in current literature, the corporate income tax has no incentive effect. If the principal accounts for the real option we show that paradoxical tax effects may occur. Also, with respect to the effect of the real option on the incentive problem we show that the option makes it less attractive for the principal to induce the agent to exert a high effort.

Keywords: Tax Effects, Real Options, Moral Hazard, Investment Decisions

JEL Classification: M41, D86, H25, H21

Suggested Citation

Meißner, Fabian and Schneider, Georg Thomas and Sureth-Sloane, Caren, The Impact of Corporate Taxes and Flexibility on Entrepreneurial Decisions with Moral Hazard and Simultaneous Firm and Personal Level Taxation (January 11, 2013). Arqus Quantative Tax Research Discussion Paper No. 141. Available at SSRN: https://ssrn.com/abstract=2219190 or http://dx.doi.org/10.2139/ssrn.2219190

Fabian Meißner

University of Paderborn ( email )

Warburger Str. 100
D-33098 Paderborn
Germany

Georg Thomas Schneider

University of Graz ( email )

Austria

Caren Sureth-Sloane (Contact Author)

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

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