Discussion Paper Details

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Title: Taxation and Regulation of Bonus Pay

Author(s): Timothy J. Besley and Maitreesh Ghatak

Publication Date: August 2011

Keyword(s): bonus, incentives and taxation

Programme Area(s): Industrial Organization and Public Economics

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.

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Bibliographic Reference

Besley, T and Ghatak, M. 2011. 'Taxation and Regulation of Bonus Pay'. London, Centre for Economic Policy Research.