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Abstract:

Development Discussion Paper
Taxation and Regulation of Bonus Pay
Timothy Besley and Maitreesh Ghatak
July 2011
Paper No' EOPP 030:
Full Paper (pdf)

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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 risktaking 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.