Too many to fail - How bonus taxation prevents gambling for bailouts

Konferenzbeitrag

Using a simple symmetric principal-agent model of two banks, this paper studies the effects of both bailouts and bonus taxes on risk taking and managerial compensation. In contrast to existing literature, we assume financial institutions to be systemic only on a collective basis, implying support only if they collectively fail. This too-many-to-fail assumption generates incentives for herding and collective moral hazard. If banks can anticipate bailouts, they can coordinate on equilibrium where they collectively incentivize higher risk-taking. A bonus tax can prevent this market failure, even if it is implemented unilaterally: proper bonus taxation reduces risk-taking of the taxed bank and, consequentially, rules out the equilibrium with high risk-taking of both banks. In preventing market failure due to banks collective moral hazard, bonus taxation reestablishes market discipline.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Beiträge zur Jahrestagung des Vereins für Socialpolitik 2014: Evidenzbasierte Wirtschaftspolitik - Session: Taxation III ; No. C15-V2

Classification and Topics

• Classification: Wirtschaft ; Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes ; Personnel Economics: Compensation and Compensation Methods and Their Effects ; Corporate Finance and Governance: Government Policy and Regulation

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Hilmer, Michael
• Event: Veröffentlichung
• (who): ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften, Leibniz-Informationszentrum Wirtschaft
• (where): Kiel und Hamburg
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/100552
• Last update: 10.03.2025, 11:44 AM CET