Bailouts and the Optimal Taxation of Bonus Pay | Zendy

Timothy Besley | Zendy; Maitreesh Ghatak | Zendy

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Bailouts and the Optimal Taxation of Bonus Pay

Author(s) -

Timothy Besley,

Maitreesh Ghatak

Publication year - 2013

Publication title -

american economic review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 16.936

H-Index - 297

eISSN - 1944-7981

pISSN - 0002-8282

DOI - 10.1257/aer.103.3.163

Subject(s) - economics , financial intermediary , intermediary , equity (law) , productivity , monetary economics , microeconomics , argument (complex analysis) , financial market , capital (architecture) , equity capital , outcome (game theory) , capital market , finance , macroeconomics , biochemistry , chemistry , political science , law , history , archaeology

This paper argues that the possibility of bailouts to financial intermediaries distorts the supply price of capital and creates an argument for taxing financial bonuses separately from other sources of income. We develop a model of financial contracting where intermediaries compete for workers whose actions affect productivity and risk-taking in the financial sector. This derives the second-best optimum and market equilibrium. The optimal taxes that we propose increase both equity and efficiency compared to the pure market outcome.

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