Taxation, risk aversion, and the wage gaps in tournaments

In this paper’s tournament model, the effect of income taxes on workers’ effort depends on risk preferences. At risk neutrality and low levels of worker risk aversion effort falls with higher taxes, whereas with sufficiently high risk aversion effort increases with tax rises. In the former, firms respond to higher taxes by reducing the wage spread and increasing it in the latter. It sheds light on why top earners’ income has risen with tax reductions over the last five decades. With females being more risk averse it suggests tax reductions contribute to the CEO gender pay gap.