Work

The effect of tax policy uncertainty on incentivization, managerial effort and total surplus

Year: 2025

Type: article

Abstract: This paper examines the effect of tax policy uncertainty on incentivization and managerial effort in an agency model with risk-averse principal and agent. If the agent’s effort is unobservable, the agent’s variable share of profit acts as a risk-sharing and incentivizing instrument. Then, a countercyclical tax base policy at the agent level or a procyclical policy at the principal level can increase the agent’s variable share of profit, whose increase in turn increases the agent’s effort. This theoretical finding favors a procyclical tax policy at the company level (principal) and a countercyclical one at the employee level (agent). Tax policy uncertainty in the sense of tax base risk makes this increase in effort possible and strengthens effects. Additionally, under a countercyclical tax base policy at the agent level, tax base risk at the agent level up to a certain level increases overall utility and thus total surplus.

Source: Journal of Business Economics

DOI: 10.1007/s11573-025-01227-w

Author: Alexandra Spaeth

Language: English

Topic: Corporate Taxation and Avoidance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: hybrid

Estimated APC paid: $3,090

Funder: Gottfried Wilhelm Leibniz Universität Hannover