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A Theory of Managerial Compensation and Taxation with Endogenous Risk

Korpeoglu, CG; Spear, S; (2017) A Theory of Managerial Compensation and Taxation with Endogenous Risk. Economic Theory Bulletin , 6 pp. 81-100. 10.1007/s40505-017-0125-4. Green open access

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Abstract

We study the impact of endogenous shocks driven by collective actions of managers. We analyze how such endogenous shocks impact social welfare by employing an overlapping-generations model. We first prove that the competitive equilibrium allocation is suboptimal because of the externalities in managers’ wages and in equity market. We establish that a socially optimal allocation can be achieved if the planner imposes wage taxes (or subsidies) on managers and equity taxes. Our results help provide an alternative explanation as to why managers are compensated and taxed differently than other workers. We then extend the model by incorporating unobservable actions for managers and show that a second-best allocation can be implemented if the planner imposes equity taxes.

Type: Article
Title: A Theory of Managerial Compensation and Taxation with Endogenous Risk
Open access status: An open access version is available from UCL Discovery
DOI: 10.1007/s40505-017-0125-4
Publisher version: https://doi.org/10.1007/s40505-017-0125-4
Language: English
Additional information: This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made.
Keywords: Endogenous uncertainty, Social welfare, Externality, Overlapping generations
UCL classification: UCL
UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > UCL School of Management
URI: https://discovery.ucl.ac.uk/id/eprint/1575720
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