Working Paper: CEPR ID: DP8532
Authors: Timothy J. Besley; Maitreesh Ghatak
Abstract: We explore the consequence for taxation and regulation of bonus pay when investors are protected by taxpayers from downside risk. The paper develops a model where workers in financial sector firms make decisions about effort and risk-taking which are influenced by the structure of bonus pay. Bailouts lead to too little effort, too much risk taking and increase inequality. We show that the optimal structure of bonuses can be implemented by a combination of a regulation on the structure of bonuses and a tax on their level.
Keywords: bonus; incentives; taxation
JEL Codes: D53; D86; H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government bailouts (H81) | Reduced effort (D29) |
| Government bailouts (H81) | Increased risk-taking (G41) |
| Reduced effort (D29) | Increased risk-taking (G41) |
| Government bailouts (H81) | Structure of bonus pay (J33) |
| Regulation and taxation (G18) | Optimal structure of bonuses (M52) |
| Limited liability (K13) | Rent due to scarcity (R21) |
| Market equilibrium (D53) | Excessive risk-taking (D81) |
| Market equilibrium (D53) | Reduced efficiency (D61) |
| Market equilibrium (D53) | Increased inequality (F61) |