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on Contract Theory and Applications |
| By: | Schöndube, Jens Robert; Spaeth, Alexandra |
| Abstract: | In practice, both pre- and after-tax performance measures are used to incentivize managers. In this paper, we analyze the optimality of these performance measures in an agency setting, assuming that both the principal and the agent face tax base risks. Switching from a pre-tax to an after-tax measure introduces a risk effect, including an additional variance and a covariance effect, both of which stem from the principal's tax base risk. We show that the after-tax measure is the optimal performance measure if and only if the negative covariance effect dominates the variance effect. If the principal can evade taxes, there is a tax evasion effect in addition to the risk effect, which captures the distortion of tax evasion under the after-tax measure. Now, using the after-tax measure is only optimal, if the weighted risk effect is stronger than the tax evasion effect. Tax revenue may not be maximized by using the optimal performance measure if the agent's tax base risk and the firm's cash flow are positively correlated. While the pay-performance sensitivity of the optimal contract is independent of tax avoidance under the pre-tax measure, under the after-tax measure it is decreasing with increasing incentives for sheltering. If tax evasion is possible, lower levels of tax evasion under the after-tax measure result in an increase in tax revenue relative to the pre-tax measure. The results of our study have implications for contract design, tax political actions and tax revenues. |
| Keywords: | agency theory, performance measures, taxation, tax evasion, tax base risk |
| JEL: | D86 M41 M48 M52 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:han:dpaper:dp-727 |
| By: | Bianchi, Milo; Yamashita, Takuro |
| Abstract: | We analyze the optimal investment in a common infrastructure in a market with network externalities. Taking a dynamic mechanism design perspective, we contrast the level of investment and the associated payments across firms that a budget-constrained welfare-maximizing principal would set to those emerging in an unregulated market. We consider two market scenarios: first, a nascent market in which only one firm operates and an entrant may arrive at a later stage; second, a more mature market in which two firms already operate. In these settings, the principal needs to set access fees so as to provide enough incentives to invest in the infrastructure, while also avoiding wasteful investment. At the same time, the principal needs to coordinate investment and usage of the shared network given the various externalities that each firm exerts. We highlight the relative importance of these two aspects and how regulation can be designed so as to improve social welfare. We also highlight how the optimal timing of investment depends crucially on the regulator’s coordination power. |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:129665 |
| By: | Raphael Boleslavsky; Aaron Kolb |
| Abstract: | A sender has a privately known preference over the action chosen by a receiver. The sender would like to influence the receiver's decision by providing information, in the form of a statistical experiment or test. The technology for information production is controlled by a monopolist intermediary, who offers a menu of tests and prices to screen the sender's type, possibly including a "threat" test to punish nonparticipation. We characterize the intermediary's optimal screening menu and the associated distortions, which we show may benefit the receiver. We compare the sale of persuasive information with other forms of influence -- overt bribery and controlling access. |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2408.03689 |