IDEAS home Printed from https://ideas.repec.org/p/zbw/arqudp/141.html
   My bibliography  Save this paper

The impact of corporate taxes and flexibility on entrepreneurial decisions with moral hazard and simultaneous firm and personal level taxation

Author

Listed:
  • Meißner, Fabian
  • Schneider, Georg
  • Sureth, Caren

Abstract

In this paper we investigate the incentive effects of corporate taxes in an agency setting with a principal facing an investment opportunity including an abandonment option. We are particularly interested in the interplay of taxation and the real option on the principal's incentives to motivate the agent to work hard. First, we extend the well-known studies on tax effects on decision making under uncertainty to moral hazard settings. In a benchmark case we find that, as confirmed in current literature, the corporate income tax has no incentive effect. If the principal accounts for the real option we show that paradoxical tax effects may occur. Also, with respect to the effect of the real option on the incentive problem we show that the option makes it less attractive for the principal to induce the agent to exert a high effort.

Suggested Citation

  • Meißner, Fabian & Schneider, Georg & Sureth, Caren, 2013. "The impact of corporate taxes and flexibility on entrepreneurial decisions with moral hazard and simultaneous firm and personal level taxation," arqus Discussion Papers in Quantitative Tax Research 141, arqus - Arbeitskreis Quantitative Steuerlehre.
    • Handle: RePEc:zbw:arqudp:141
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/68469/1/734119690.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Rainer Niemann, 2011. "Asymmetric Taxation and Performance-Based Incentive Contracts," CESifo Working Paper Series 3363, CESifo.
    2. Boadway, Robin & Bruce, Neil, 1984. "A general proposition on the design of a neutral business tax," Journal of Public Economics, Elsevier, vol. 24(2), pages 231-239, July.
    3. Sunil Dutta & Stefan Reichelstein, 2003. "Leading Indicator Variables, Performance Measurement, and Long‐Term Versus Short‐Term Contracts," Journal of Accounting Research, Wiley Blackwell, vol. 41(5), pages 837-866, December.
    4. Mackie-Mason, Jeffrey K., 1990. "Some nonlinear tax effects on asset values and investment decisions under uncertainty," Journal of Public Economics, Elsevier, vol. 42(3), pages 301-327, August.
    5. Paul A. Samuelson, 1964. "Tax Deductibility of Economic Depreciation to Insure Invariant Valuations," Journal of Political Economy, University of Chicago Press, vol. 72(6), pages 604-604.
    6. Liang, P.J., 1999. "Accounting Recognition, Moral Hazard, and Communication," GSIA Working Papers 1999-33, Carnegie Mellon University, Tepper School of Business.
    7. Gries, Thomas & Prior, Ulrich & Sureth, Caren, 2007. "Taxation of risky investment and paradoxical investor behavior," arqus Discussion Papers in Quantitative Tax Research 26, arqus - Arbeitskreis Quantitative Steuerlehre.
    8. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    9. Reichelstein, S, 2000. "Providing managerial incentives: Cash flows versus accrual accounting," Journal of Accounting Research, Wiley Blackwell, vol. 38(2), pages 243-269.
    10. Rainer Niemann & Caren Sureth, 2011. "The Impact of Differential Capital Income Taxation on the Value of Risky Projects," Economics Bulletin, AccessEcon, vol. 31(2), pages 1047-1054.
    11. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
    12. Nick Bloom & Stephen Bond & John Van Reenen, 2007. "Uncertainty and Investment Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(2), pages 391-415.
    13. Karen Alpert, 2010. "Taxation and the Early Exercise of Call Options," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(5‐6), pages 715-736, June.
    14. Paolo M. Panteghini, 2005. "Asymmetric Taxation under Incremental and Sequential Investment," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(5), pages 761-779, December.
    15. Drymiotes, George, 2007. "The monitoring role of insiders," Journal of Accounting and Economics, Elsevier, vol. 44(3), pages 359-377, December.
    16. Wong, Kit Pong, 2009. "Progressive taxation, tax exemption, and corporate liquidation policy," Economic Modelling, Elsevier, vol. 26(2), pages 295-299, March.
    17. Anil Arya & Jonathan Glover & Bryan R. Routledge, 2002. "Project Assignment Rights and Incentives for Eliciting Ideas," Management Science, INFORMS, vol. 48(7), pages 886-899, July.
    18. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
    19. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    20. Thomas Gries & Ulrich Prior & Caren Sureth, 2012. "A Tax Paradox for Investment Decisions under Uncertainty," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 14(3), pages 521-545, June.
    21. Pennings, Enrico, 2000. "Taxes and stimuli of investment under uncertainty," European Economic Review, Elsevier, vol. 44(2), pages 383-391, February.
    22. Banerjee, Anindya & Besley, Timothy, 1990. "Moral Hazard, Limited Liability and Taxation: A Principal-Agent Model," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 46-60, January.
    23. Bonds, Stephen R. & Devereux, Michael P., 1995. "On the design of a neutral business tax under uncertainty," Journal of Public Economics, Elsevier, vol. 58(1), pages 57-71, September.
    24. Barbara Schondube-Pirchegger & Jens Robert Schondube, 2010. "On the Appropriateness of Performance-Based Compensation for Supervisory Board Members - An Agency Theoretic Approach," European Accounting Review, Taylor & Francis Journals, vol. 19(4), pages 817-835.
    25. Karen Alpert, 2010. "Taxation and the Early Exercise of Call Options," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(5-6), pages 715-736.
    26. Niemann, Rainer & Sureth, Caren, 2009. "Investment effects of capital gains taxation under simultaneous investment and abandonment flexibility," arqus Discussion Papers in Quantitative Tax Research 77, arqus - Arbeitskreis Quantitative Steuerlehre.
    27. Paolo M. Panteghini, 2004. "Wide versus Narrow Tax Bases under Optimal Investment Timing," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 60(4), pages 482-482, December.
    28. Brian Mittendorf, 2004. "Information Revelation, Incentives, and the Value of a Real Option," Management Science, INFORMS, vol. 50(12), pages 1638-1645, December.
    29. Pierre Jinghong Liang, 2000. "Accounting Recognition, Moral Hazard, and Communication," Contemporary Accounting Research, John Wiley & Sons, vol. 17(3), pages 458-490, September.
    30. Bushman, Robert M. & Indjejikian, Raffi J., 1993. "Accounting income, stock price, and managerial compensation," Journal of Accounting and Economics, Elsevier, vol. 16(1-3), pages 3-23, April.
    31. Luis H. R. Alvarez & Erkki Koskela, 2008. "Progressive Taxation, Tax Exemption, and Irreversible Investment under Uncertainty," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(1), pages 149-169, February.
    32. Niemann, Rainer & Sureth, Caren, 2004. "Tax neutrality under irreversibility and risk aversion," Economics Letters, Elsevier, vol. 84(1), pages 43-47, July.
    33. Elettra Agliardi, 2001. "Taxation and Investment Decisions: A Real Options Approach," Australian Economic Papers, Wiley Blackwell, vol. 40(1), pages 44-55, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Schneider, Georg & Sureth, Caren, 2010. "The impact of profit taxation on capitalized investment with options to delay and divest," arqus Discussion Papers in Quantitative Tax Research 97, arqus - Arbeitskreis Quantitative Steuerlehre.
    2. Niemann, Rainer & Sureth, Caren, 2009. "Investment effects of capital gains taxation under simultaneous investment and abandonment flexibility," arqus Discussion Papers in Quantitative Tax Research 77, arqus - Arbeitskreis Quantitative Steuerlehre.
    3. Fahr, René & Janssen, Elmar & Sureth, Caren, 2014. "Can tax rate increases foster investment under entry and exit flexibility? Insights from an economic experiment," arqus Discussion Papers in Quantitative Tax Research 166, arqus - Arbeitskreis Quantitative Steuerlehre.
    4. Gries, Thomas & Prior, Ulrich & Sureth, Caren, 2007. "Taxation of risky investment and paradoxical investor behavior," arqus Discussion Papers in Quantitative Tax Research 26, arqus - Arbeitskreis Quantitative Steuerlehre.
    5. Rainer Niemann & Caren Sureth-Sloane, 2015. "Investment Effects of Wealth Taxes under Uncertainty and Irreversibility," CESifo Working Paper Series 5610, CESifo.
    6. Rainer Niemann & Caren Sureth-Sloane, 2019. "Investment timing effects of wealth taxes under uncertainty and irreversibility," Journal of Business Economics, Springer, vol. 89(4), pages 385-415, June.
    7. Wong, Kit Pong, 2011. "Progressive taxation and the intensity and timing of investment," Economic Modelling, Elsevier, vol. 28(1-2), pages 100-108, January.
    8. Wong, Kit Pong, 2011. "Progressive taxation and the intensity and timing of investment," Economic Modelling, Elsevier, vol. 28(1), pages 100-108.
    9. Wong, Kit Pong, 2009. "Progressive taxation, tax exemption, and corporate liquidation policy," Economic Modelling, Elsevier, vol. 26(2), pages 295-299, March.
    10. Luis H. R. Alvarez & Erkki Koskela, 2005. "Progressive Taxation and Irreversible Investment under Uncertainty," CESifo Working Paper Series 1377, CESifo.
    11. Paolo M. Panteghini, 2005. "Asymmetric Taxation under Incremental and Sequential Investment," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(5), pages 761-779, December.
    12. Rainer Niemann & Caren Sureth-Sloane, 2016. "Does Capital Tax Uncertainty Delay Irreversible Risky Investment?," CESifo Working Paper Series 6046, CESifo.
    13. Niemann, Rainer & Sureth-Sloane, Caren, 2015. "Investment effects of wealth taxes under uncertainty and irreversibility," arqus Discussion Papers in Quantitative Tax Research 192, arqus - Arbeitskreis Quantitative Steuerlehre.
    14. Niemann, Rainer & Sureth, Caren, 2016. "Does capital tax uncertainty delay irreversible risky investment?," arqus Discussion Papers in Quantitative Tax Research 209, arqus - Arbeitskreis Quantitative Steuerlehre.
    15. Caren Sureth, 2002. "Partially Irreversible Investment Decisions and Taxation under Uncertainty: A Real Option Approach," German Economic Review, Verein für Socialpolitik, vol. 3(2), pages 185-221, May.
    16. Panteghini Paolo, 2001. "On Corporate Tax Asymmetries and Neutrality," German Economic Review, De Gruyter, vol. 2(3), pages 269-286, August.
    17. Ramón E. López & Pablo Gutiérrez Cubillos & Eugenio Figueroa, 2020. "The Tax Paradox and Weak Tax Neutrality," Southern Economic Journal, John Wiley & Sons, vol. 86(3), pages 1150-1169, January.
    18. Mehrmann, Annika & Schneider, Georg & Sureth, Caren, 2012. "Asymmetric taxation of profits and losses and its influence on investment timing: Paradoxical effects of tax increases," arqus Discussion Papers in Quantitative Tax Research 134, arqus - Arbeitskreis Quantitative Steuerlehre.
    19. Ralf Ewert & Rainer Niemann, 2011. "Haftungsbeschränkungen, Verlustverrechnungsbeschränkungen und die Bereitschaft zur Risikoübernahme," Schmalenbach Journal of Business Research, Springer, vol. 63(63), pages 94-131, January.
    20. Niemann, Rainer & Sureth, Caren, 2008. "Steuern und Risiko als substitutionale oder komplementäre Determinanten unternehmerischer Investitionspolitik?," arqus Discussion Papers in Quantitative Tax Research 51, arqus - Arbeitskreis Quantitative Steuerlehre.

    More about this item

    Keywords

    Tax Effects; Real Options; Moral Hazard; Investment Decisions;
    All these keywords.

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:arqudp:141. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: http://www.arqus.info/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.