London School of Economics EOPP: Economic Organisation and Public Policy Programme LSE
EOPP: Economic Organisation and Public Policy Programme

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Taxation and Regulation of Bonus Pay

Timothy Besley, Maitreesh Ghatak, July 2011
Paper No' EOPP 030: | Full paper (pdf)
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This Paper is published under the following series: Economic Organisation and Public Policy Discussion Papers
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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 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.