Asymmetric Taxation and Performance-Based Incentive Contracts - 11 Mar 2011
This paper analyzes the effects of symmetric and asymmetric taxation on
performance-based versus fixed remuneration contracts. I integrate a
proportional corporation tax and a proportional wage tax into a binary
principal-agent model. The wage tax increases the remuneration costs and
makes the agent's employment less attractive. Thus, the principal tends
to demand lower rather than higher effort or does not offer a contract
at all. In contrast to the wage tax, the corporate tax is irrelevant for
the optimal remuneration contract. Under asymmetric corporate taxation,
the principal tends to offer contracts less frequently. Fixed
remuneration contracts are penalized more heavily by asymmetric taxation
than performance-based remuneration contracts.
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