Do tax cuts encourage rent seeking by top corporate executives? Theory and evidence

Abstract

This paper explores the role of tax policy in shaping incentives for executive effort(labor supply) and rent seeking within the firm. We develop a theoretical model thatdistinguishes between effort and rent-seeking responses to income taxes, and providesa framework to estimate a lower bound for the rent-seeking response. Using executivecompensation and governance data, we find that rent seeking represents an importantcomponent of the response to changes in tax rates, especially among executives in firmswith the worst corporate governance.