DP8532 Taxation and Regulation of Bonus Pay

Author(s): Timothy J. Besley, Maitreesh Ghatak
Publication Date: August 2011
Keyword(s): bonus, incentives, taxation
JEL(s): D53, D86, H21
Programme Areas: Public Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8532

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.