Do Tax Cuts Encourage Rent Seeking by Top Corporate Executives? Theory and Evidence

17 Pages Posted: 25 Feb 2019

See all articles by Dana C. Andersen

Dana C. Andersen

University of Alberta - Department of Economics

Ramón López

University of Chile

Date Written: April 2019

Abstract

This paper explores the role of tax policy in shaping incentives for executive effort (labor supply) and rent seeking within the firm. We develop a theoretical model that distinguishes between effort and rent‐seeking responses to income taxes, and provides a framework to estimate a lower bound for the rent‐seeking response. Using executive compensation and governance data, we find that rent seeking represents an important component of the response to changes in tax rates, especially among executives in firms with the worst corporate governance.

JEL Classification: D31, G30, H21

Suggested Citation

Andersen, Dana C. and López, Ramón, Do Tax Cuts Encourage Rent Seeking by Top Corporate Executives? Theory and Evidence (April 2019). Contemporary Economic Policy, Vol. 37, Issue 2, pp. 219-235, 2019, Available at SSRN: https://ssrn.com/abstract=3339446 or http://dx.doi.org/10.1111/coep.12278

Dana C. Andersen (Contact Author)

University of Alberta - Department of Economics ( email )

8-14 Tory Building
Edmonton, Alberta T6G 2H4
Canada

Ramón López

University of Chile ( email )

Pío Nono Nº1, Providencia
Santiago, R. Metropolitana 7520421
Chile

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