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 sufficient risk aversion effort increases in response to tax rises. In the former case, firms respond to higher taxes by reducing the wage spread and by increasing it in the latter case. 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.
|Name||Discussion Paper in Economics|
|Publisher||University of Aberdeen|
- CEO pay