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Pay for Politicians and Candidate Selection: An Empirical Analysis
Abstract
A growing theoretical literature on the effect of politicians' salaries on the average level of skills of political
candidates yields ambiguous predictions. In this paper, we estimate the effect of pay for politicians on the
level of education of parliamentary candidates. We take advantage of an exceptional reform where the
salaries of Finnish MPs were increased by 35% in the year 2000, intended to make the pay for parliamentarians more competitive. A difference-in-differences analysis, using candidates in municipal elections as a control group, suggests that the higher salary increased the fraction of candidates with higher education among female candidates, while we find no significant effect for male candidates.
... Gagliarducci and Nannicini (2013) note that according to efficiency wage theory, higher pay for politicians should improve performance by attracting higher quality candidates and making elected officials more motivated and responsive to voters by increasing the costs of being voted out of office. Studies reveal pay for politicians is positively linked to education levels of candidates (Gagliarducci & Nannicini, 2013;Kotakorpi & Poutvaara, 2011), participation of female candidates running for office, and performance of elected officials while in office (Di Tella & Fisman, 2004;Gagliarducci & Nannicini, 2013). Increasing wages for elected officials may also encourage retention among politicians, although the evidence suggests the effect of pay on the likelihood of running for re-election is modest (Diermeier et al., 2005). ...
... The analysis offers no evidence that pay for elected officials is linked to organizational performance. This stands in contrast to claims paying politicians more can improve governmental performance by attracting more qualified candidates, improving their performance while in office, and keeping them involved in politics (Di Tella & Fisman, 2004;Diermeier et al., 2005;Gagliarducci & Nannicini, 2013;Kotakorpi & Poutvaara, 2011). This finding should be interpreted with caution, however, as the importance of pay for elected officials likely depends on context. ...
Despite the recurrent focus on pay as an incentive and the myriad reforms of public sector compensation, researchers have generated surprisingly little evidence of the link between pay level and organizational performance. We propose a theoretical model of how pay leads to improvements in organizational performance by enhancing recruitment, motivation, and retention. Given scarce resources and constraints on the ability to financially reward public officials, we engage the top‐down, bottom‐up debate in policy implementation to theorize about whether pay for elected officials or bureaucrats matters more for performance. Our analysis of panel data from South African municipalities reveals increasing pay for bureaucrats – but not for elected officials – can improve delivery of labor‐intensive public services. However, the results also suggest higher pay may embolden bureaucrats to break rules regarding public spending, thereby weakening accountability. This article is protected by copyright. All rights reserved.
... We measure politicians' quality by their years of completed education, widely recognized as a good proxy for the level of human capital ( Dal Bó et al., 2006;Galasso and Nannicini, 2011;Fortunato and Panizza, 2015;Kotakorpi and Poutvaara, 2011;Glaeser et al., 2004 ). We deem this a reliable measure of politicians' quality. ...
... Besley et al. (2017) andDal Bó et al. (2017) provide a measure by constructing an earnings score that relates to politicians' education and occupation. However, since information on politicians' earnings are not publicly available in Italy, we measure the quality of politicians by their years of completed education; a measure recognized both as a good proxy for the level of human capital ( Dal Bó et al., 2006;Galasso and Nannicini, 2011;Fortunato and Panizza, 2015;Kotakorpi and Poutvaara, 2011;Glaeser et al., 2004 ) and as an important driver of good economic performances as shown in Fenizia and Saggio (2021) . Moreover, we complement our analysis by as an alternative measure of quality the skill-intensiveness of mayors' previous occupation. ...
Organized crime targets politicians with discretionary power over public resources, increasing the perceived risk of a political career and lowering its expected payoff. Since experimental evidence shows that women are more risk averse than men, organized crime infiltration should prove more effective in discouraging highly qualified women to take part in politics compared to men with the same level of power. The difference-in-differences estimates, which exploit the municipal government dissolution for mafia infiltration as an exogenous shock to the involvement of organized crime in local politics, reveal that organized crime has a stronger negative effect on the quality of female politicians compared to men. However, our results are compatible with alternative mechanisms such as organized crime influence on voters’ culture and on parties’ recruitment policies. Since our analysis is not conclusive, further research is needed to clearly identify the most likely driver of our results.
... 1 This article also speaks to a large body of work on the determinants of political selection. Researchers have studied how monetary rewards affect the quality of candidates for government jobs (Dal Bó, Finan and Rossi 2013;Ferraz and Finan 2009;Keane and Merlo 2010;Kotakorpi and Poutvaara 2011;Krueger 1988). We complement this line of research by studying the selection effects of a reduction in non-wage benefits due to anticorruption enforcement. ...
... Previous studies have identified several ways in which governments can attract talent. 2 One approach is simply to pay them a higher salary. Raising the formal salaries of public servants has been shown to improve the quality of candidates for government jobs (for example, Dal Bó, Finan and Rossi 2013;Ferraz and Finan 2009;Kotakorpi and Poutvaara 2011). In systems that have a 'revolving door' arrangement, talent may also be drawn into public service with the expectation of post-tenure rewards in the private sector (Blanes i Vidal, Draca and Fons-Rosen 2012; Eggers and Hainmueller 2009). ...
Fighting corruption is often seen as a crucial step toward building better institutions, but how it affects political selection remains less well understood. This article argues that in systems where corruption functions as an informal incentive for government to attract talent, anticorruption initiatives that curb rent-seeking opportunities may unintentionally weaken both the quality and the representativeness of the bureaucracy. The authors test this argument in China using an original nationwide survey of government officials and an identification strategy that exploits exogenous variations in enforcement levels created by the recent anticorruption campaign. The study finds that intensified enforcement has generated two potentially negative selection effects: a deterrence effect that lowers the average ability of newly recruited bureaucrats, and a compositional effect that discourages the entry of lower-class individuals in favor of those who are affluent and well connected. These findings highlight important hidden human capital costs of corruption elimination in developing countries.
... The role of politicians' pay as a disciplining and selection device ultimately remains an empirical question. But the evidence is mixed as well, in terms of both incentives and selection: the link between pay and quality-typically measured by personal characteristics such as education or occupation-can be positive (Ferraz and Finan 2009;Gagliarducci and Nannicini 2013), negative (Fisman et al. 2015;Pique 2019), or nil (Braendle 2015;Kotakorpi and Poutvaara 2011). Similarly, higher pay does not necessarily lead to greater effort (Fisman et al. 2015;Pique 2019). ...
... Second, I examine the effect of pay on the characteristics of list leaders and of the election winners. The effect of remuneration on a politician's quality is unclear, as it can be positive (Ferraz and Finan 2009;Gagliarducci and Nannicini 2013), negative (Fisman et al. 2015; Pique 2019), or even nil (Braendle 2015;Kotakorpi and Poutvaara 2011). If the quality of politicians is correlated with their labor-market performances, candidates' financial capacities for campaigning could be affected. ...
This paper studies the relationship between politicians’ pay and the campaign spending of candidates running in the French municipal elections. For that purpose, I construct a dataset containing the campaign records of all lists running in the 2008 and 2014 elections in municipalities of more than 9000 inhabitants. I implement a regression discontinuity design exploiting a population threshold in elected officials’ pay. The results show that, around the 20,000-inhabitant threshold, the pay level negatively impacts candidates’ spending. That puzzling result is not only statistically significant, but also economically sizeable: the amounts spent by lists running in municipalities just above the threshold are up to 35% less than those of lists running just below the population threshold. The result combines with an important reduction in the intensity of political competition, favoring an incumbent’s reelection. I also provide some evidence of a decline in mayoral quality. The results suggest that politicians’ pay does shape their incentives, but higher pay can favor the persistence of low-quality mayors.
... Our results suggest that those males who have benefited from RAEs during early-life in school seem to perform better, and thus, political selection in Finland is at least to some extent meritocratic. Therefore, we contribute to understanding political selection (see, e.g., Caselli and Morelli, 2004, and Poutvaara and Takalo, 2007, for theoretical foundations, and Galasso and Nannicini, 2011, Kotakorpi and Poutvaara, 2011, Brollo et al., 2013, and Dal Bó et al., 2017 among others for empirical evidence). On the other hand, our result has a less encouraging implication: We seem to be losing irreversibly potential talent among the late born in the political arena due to the artificial division of children into different age groups. ...
... That political competition would affect talented women disproportionally is plausible since able citizens have better outside options to a political career (see, e.g., Caselli and Moreno, 2004and Poutvaara and Takalo, 2007for theory, and Brollo et al., 2013. Furthermore, Kotakorpi and Poutvaara (2011) provide evidence also from Finnish parliamentary elections suggesting that women are more sensitive to the opportunity costs of entering to politics. ...
We exploit a regression discontinuity design to provide causal evidence of the relative age effect (RAE) on a long-run adult age outcome: Political selection. We find strong evidence of the RAE in politics in Finland. However, the effect is heterogeneous: We find that male candidates born early in the calendar year have a significantly higher probability of getting elected to the parliament but no similar RAE applies to female candidates nor to municipal elections. Moreover, this effect only takes place in the most competitive parliamentary districts and is present only for some parties. We also find that in all the groups where the RAE does not exist, early-born candidates are under-represented suggesting attrition of talent in the candidate placement. Overall, our results show that seemingly artificial cutoffs imposed by the government have persistent consequences even on the selection to the highest positions of power within a society.
... A second group of studies instead focuses on the supply side, showing that both monetary and non-monetary incentives might affect individuals' decision to enter politics. Kotakorpi andPoutvaara (2011), Ferraz andFinan (2009) and Gagliarducci and Nannicini (2013) show that higher salaries attract more educated individuals to politics in Finland, Brazil and Italy, respectively. Daniele and Geys (2015) and Daniele (2017) exploit shocks in the presence of criminal organizations in Italian municipalities to show that educated individuals drop out of politics when criminal groups are stronger, as they decrease the expected payoffs from politics (Dal Bó et al., 2006). ...
... For instance, Daniele and Geys (2015) and Daniele (2017) estimate a change in politicians' education due to mafia presence of about 35% of a standard deviation. Kotakorpi and Poutvaara (2011) find that a 35% increase in salary leads to a 5-percentage-point increase in candidates with high education. Baltrunaite et al. (2014) report a modest increase of 2-3 months in politicians' education after the introduction of gender quotas. ...
We observe that popularity shocks are crucial for electoral accountability beyond their effects on voters' behaviors. By focusing on Brazilian politics, we show that the disclosure of audit reports on the (mis)use of federal funds by local administrators affects the type of candidates who stand for election. When the audit finds low levels of corruption, the parties supporting the incumbent select less-educated candidates. On the contrary, parties pick more-educated candidates when the audit reveals a high level of corruption. These effects are stronger in municipalities that have easier access to local media.
... To this end, we need a measure for leaders' competence, which is difficult because of conceptual and data availability reasons. The standard approach in the literature is to exploit information on leaders' education to approximate the competence of politicians (see, e.g., Baltrunaite et al., 2014;Galasso and Nannicini, 2011;Kotakorpi and Poutvaara, 2011). A rationale behind this imperfect proxy is that educated people make on average better economic decisions (see, e.g., Agarwal and Mazumder, 2013;D'Acunto et al., 2019). ...
We present a simple model, illustrating how democracy may improve the quality of the economic institutions. The model further suggests that institutional quality varies more across autocracies than across democracy and that the positive effect of democracies on economic institutional quality increases in people’s human capital. Using a panel data set that covers 150 countries and the period from 1920 to 2019, and different measures of economic institutional quality, we show results from fixed effect and instrumental variable regressions that are in line with the predictions of our model.
... First, CRA staff members are likely to view leaders with prestigious educations as better qualified to govern because they perceive them as more intelligent, more rigorously educated, and presumably more aware of the negative effects of default. Within political science, it has become common practice to use educational attainment as a proxy for leader quality or competency (e.g., Kotakorpi & Poutvaara, 2011;Carnes & Lupu, 2016). This assumption is underpinned by findings that leaders with more education preside over greater economic growth and initiate more reforms (Dreher et al., 2009). ...
The Technocratic and Education Dataset (TED) provides comprehensive new data on the educational and professional backgrounds of the heads of government of all sovereign states between 1946 and 2015. TED details the educational and employment credentials of 1733 unique heads of government, and provides additional information on their demographic backgrounds and military experience. TED comes in leader-level and country-year versions. These data make three major contributions to the study of leadership. First, TED offers a longer time series than most extant data sets on leadership. Second, TED offers data on a broader cross section of countries, facilitating scholarship on a wider variety of countries, including non-OECD ones, which are excluded from many existing datasets on leaders. Third, by offering detailed data on the educational and employment experiences of leaders, TED helps scholars interested in the mechanisms underlying the effects of these experiences generate more rigorous tests of their theories. TED, therefore, represents a major step forward for those interested in leadership. In this article, we introduce TED and use it to show how the pool of international leaders has changed over time. We end with an empirical application of the data in which we use leadership characteristics to predict countries’ sovereign credit ratings. The article concludes with a discussion of other potential applications of these new data.
... Ainsi, si chaque augmentation de 10 000 $ est corrélée par une augmentation de 0,16 du nombre de candidats, cela n'est vrai que pour les hommes. En cela, les données canadiennes ne confirment pas les travaux finlandais de Kotakorpi et Poutvaara (2011) mentionnés plus haut. ...
L’objet de ce texte est d’analyser le contexte, le contenu et les effets de la modification législative concernant la rémunération des élus municipaux, entrée en vigueur en janvier 2018, afin d’en saisir la portée au sein des transformations contemporaines du monde municipal québécois. En particulier, nous nous intéressons à la manière dont l’enjeu de la rémunération est cadré par les principales associations municipales de la province, et comment il a trouvé sa place dans une réforme municipale plus large. Pour ce faire, nous avons réalisé une analyse des documents produits sur ce sujet par les deux principales associations municipales ainsi que ceux relatifs au processus législatif (mémoires et débats associés au projet de loi no 122). L’analyse de ces deux corpus de données nous révèle que si la question de la rémunération a été cadrée comme un moyen d’assurer le recrutement des édiles et d’en reconnaître les compétences, elle est également insérée dans un discours plus large sur les revendications d’autonomie du monde municipal. L’argumentaire développé en dit autant sur l’enjeu de la (re)valorisation des mandats municipaux que sur la reconnaissance du palier municipal comme un palier de gouvernement à part entière, sans toutefois pousser explicitement la carte de la professionnalisation. Par ailleurs, l’analyse des données empiriques préliminaires sur les rémunérations montre que la loi n’a pas tellement changé les choses sur un horizon temporel 2010-2018. Nous constatons la persistance d’un clivage important entre petites et grandes municipalités : les premières maintiennent une rémunération qui favorise un modèle de l’amateur-bénévole, alors que les secondes assument une certaine professionnalisation de leurs conseils.
... Let us assume that elected politicians are remunerated with a fixed salary W , independent of their ability or performance. The salary is paid out of taxes T , such that the amount of resources available to produce the public good is (T − W ). Beside the 15 The relationship between the remuneration of politicians and their average quality has been investigated both theoretically and empirically (Besley 2004;Gersbach 2004;Messner and Polborn 2004;Beniers and Dur 2007;Poutvaara and Takalo 2007;Kotakorpi and Poutvaara 2011;Gagliarducci and Nannicini 2013;Fedele and Giannoccolo 2020). salary, benevolent politicians reap a non-monetary payoff B > 0 from doing their duty as a civil servant. ...
This paper presents a theoretical model exploring the role of institutional distance between voters and politicians in the provision of public goods and citizens’ welfare. Proximity eases access to information about public policies, increasing political accountability. However, rent-seeking politicians can bias information reducing citizens’ welfare. We show that the optimal distance depends on the pool of politicians, voters’ political awareness and the cost of distorting information. As these elements differ across regions, a one-size-fits-all institutional reform may be beneficial for some jurisdictions and detrimental for others. A mechanism based on politicians’ remuneration can mitigate possible welfare-decreasing effects of voter-politician proximity.
... Several studies indeed highlight that politicians' remuneration plays a key role in candidate selfselection as well as decision-making once elected (Besley, 2004;Messner and Polborn, 2004;Ferraz and Finan, 2011a;Kotakorpi and Poutvaara, 2011;Gagliarducci and Nannicini, 2013;Cerina and Deidda, 2017). Since local politiciansjust like most of usmay be assumed to have a positive marginal utility of money, they might have a personal, economic incentive to locate their municipality on the desired side of a population threshold implying higher remuneration. ...
... Finský výzkum, navazující na předchozí články, testoval, jak se zvýšení platů poslanců parlamentu, za využití kandidátů v municipálních volbách coby kontrolní skupiny, projevilo na kvalitě kandidátů obecně. Výsledky demonstrují, že zatímco zvýšení platů zvýšilo i podíl vysokoškolsky vzdělaných kandidátek, tak na mužské kandidáty neměly vyšší odměny žádný výrazný vliv [Kotakorpi, Poutvaara 2011]. Další článek, tentokrát provedený na úrovni italských municipalit, v podstatě rozšiřuje závěry finského výzkumu. ...
This article examines the impact that the remuneration of municipal representatives has on the political competition in the Czech Republic. Municipal representatives can perform their office either full time (an 'engaged' representative) or part time (a 'disengaged' representative). It is common in some small Czech municipalities for there to be no full-time representatives, and even mayors are disengaged. There is no central database or website in Czech Republic that contains a list of all the municipalities and disengaged representatives and it was thus very difficult to obtain the necessary data. However, the authors discovered an original method for determining whether representatives are (dis)engaged and created a unique dataset of almost 6000 Czech municipalities. They used a specific item in the expenditures of every municipality's budget that concerns compulsory social insurance payments and they sorted municipalities according to whether their representatives worked full time or part time before the 2018 Czech municipal elections. They used ordinary least square regression models to reach conclusions. The results revealed that the presence of full-time representatives before the municipal elections increased the number of candidates per seat. Therefore, the authors found that there is greater electoral competitiveness in municipalities with full-time representatives who have higher salaries.
... I also contribute to a strand of the literature on political selection. 11 Recent empirical literature on selection shows that many different features of political systems, such as the remuneration scheme (e.g., Ferraz and Finan 2009;Gagliarducci et al. 2010;Kotakorpi and Poutvaara 2011;Dal Bo´et al. 2013;Gagliarducci and Nannicini 2013), the proportion of competitive districts (e.g., Galasso and Nannicini 2017), the district magnitude (e.g., Beath et al. 2016), or the presence of closed lists (e.g., Galasso and Nannicini 2015), have significant effects on the selection of politicians. 12 While, on the one hand, my results support the predictions of the model developed by Galasso and Nannicini (2017; i.e., when pre-electoral competition is greater, parties select more competent politicians), it rejects Myerson's (1993) theory, since I find that proportional systems do not select more competent politicians. ...
Using micro-level data on local Italian elections and exploiting a discontinuity at a population cutoff, I study the effect of electoral systems on politician selection and re-election. Evidence shows that the mayor’s probability of re-election is 25 percentage points higher in majoritarian systems than in proportional systems. Ruling coalitions elected under the majoritarian system enjoy a stable and long-lasting majority, attract more central transfers, and invest more in public libraries. While mayors elected under the two different electoral systems do not differ in any observable characteristics, they do tend to embark on a different political careers once they lose their municipal office. Surprisingly, mayors elected under the proportional system have a higher probability of being elected to regional offices after their mandate.
(JEL D72, H70, P16)
... Prior research has studied the impact of community monitoring (Olken, 2007), community meetings (Besley et al. 2005, Rao & Ibáñez 2005, Alatas et al. 2013) and even direct democracy (Olken 2008, Beath et al. 2013, Hinnerich & Pettersson-Lidbom 2014 on program implementation. More broadly, this paper adds to the literature on the impact of electoral institutions on political selection and governance (Diermeier et al. 2005, Mattozzi & Merlo 2008, Keane & Merlo 2010, Banerjee et al. 2011, Kotakorpi & Poutvaara 2011, Gagliarducci & Nannicini 2013, Baltrunaite et al. 2014, Daniele & Geys 2015, Banerjee et al. 2017, 6 and how political selection affects governance characteristics. 6 Research also shows that political selection responds to factors like politician murders (Daniele, 2017), audits (Brollo et al. 2013, Cavalcanti et al. 2018, electoral competition (Galasso & Nannicini, 2011), the threat of bribes and punishment (Dal Bó et al. , 2006) and even political predecessors (Caselli & Morelli, 2004). ...
This paper evaluates the effects of encouraging the selection of local politicians in India via community consensus, as opposed to a secret ballot election. Using village-level data on candidates, elected politicians, government budgets, and workfare employment, I show that incentives for consensus elections lead to politicians that are more educated but less likely to be drawn from historically marginalized castes, and increase how regressively workfare employment is targeted. These results are supported by qualitative evidence that shows that consensus elections are prone to capture by the local elite, which may reduce the need for clientelistic transfers to the non-elite.
... There have also been many empirical studies concerning the influence of the size of politicians' salaries on the effects of their work. Increasing in salaries of members of parliament may lead to an increase in the number of highly qualified women standing as candidates for the parliament (Kotakorpi -Poutvaara 2011), while higher salaries of mayors may have a positive effect on the effectiveness of their work (Gagliarducci -Nannicini 2013). The influence of greater salaries of politicians on the increase of political competition has also been demonstrated in the case of elections to the European Parliament (Fisman et al. 2015). ...
The high rate of increase of ruling politicians' wealth has been empirically proven many times. However, in the literature it is almost always assumed that politicians grew rich faster due to political rent-seeking or corruption. The aim of this article is to discuss the assumption whether corruption and rent-seeking is indeed the only possible cause, and to present empirical findings undermining the assumption. The results of the analysis of levels and rate of growth of Polish politicians' wealth clearly show that the other explanation is the selection of people exercising authority. Based on statistical analysis of 2024 asset declarations of 689 councillors from Polish voivodeship assemblies from two terms in the period of 2010–2018, the paper demonstrates that the different rates of changes of the value of assets of coalition and opposition councillors are at least partly the effect of the selection bias.
... Empirical studies of political selection have focused on the political wage (Besley 2004;Ferraz and Finan 2009;Kotakorpi and Poutvaara 2011;Gagliarducci and Nannicini 2013;Dal Bó et al. 2013;Fisman et al. 2015), outside options (Gagliarducci et al. 2010), district competitiveness (Galasso and Nannicini 2011), monitoring institutions (Grossman and Baldassarri 2012), electoral rules (Beath et al. 2016;Galasso and Nannicini 2017), gender 1 3 quotas (Baltrunaite et al. 2014;Besley et al. 2017), organized crime (Daniele and Geys 2015;Daniele 2017), and financial asset disclosure laws (Fisman et al. 2016). 3 Four recent papers in particular are related to our focus on the impact of local autonomy in mayoral selection. ...
This paper analyzes the consequences of local fiscal autonomy with respect to political selection. We propose a model of political careers wherein the decisions to become candidates and to seek reelection are both endogenous. Private-sector aptitude and political ability are private information; the latter is revealed to the incumbent during her first period in office. We show that, following an unanticipated reduction in the returns from holding office, incumbents with high market ability are more likely to refrain from running for office again than their lower-ability counterparts. We test that prediction using an unexpected reduction in the upper bound of the municipal property tax rate, announced by Portugal’s prime minister in July 2008, just 15 months before the local elections. We rely on a comprehensive data set for all Portuguese mainland municipalities for the 2005 and 2009 elections, including the characteristics of the municipalities and individual mayors. We employ a difference-in-differences strategy to show that affected mayors—those who were forced to reduce the property tax rate, and thus faced a sharp tax revenue decline—are less likely to seek reelection. This effect is driven by high-professional-status incumbents.
... Piqu e (2015) investigates Peruvian municipalities and finds no evidence that wages affect the fraction of candidates with tertiary studies. Kotakorpi and Poutvaara (2011) focus on Finnish MPs and find a rise of female candidates with higher education, but no effect for male candidates. Hoffman and Lyons (2015) show that higher salaries are not associated with higher education of US state politicians. ...
How does pay affect the quality of politicians? This paper addresses the question by considering a three‐period citizen candidate model where potential candidates vary in skills and in public service motivation. First, potential candidates observe the level of pay in politics and simultaneously decide whether or not to run for office. Second, an election takes place and only one candidate is elected. Finally, the successful candidate provides a public good, while the others work in the market sector. In a benchmark model where potential candidates differ only in skills, the quality of the elected politician is shown to increase with pay. If public service motivation is also considered, then an inverted U‐shaped relationship is found.
... Several studies indeed highlight that politicians' remuneration plays a key role in candidate selfselection as well as decision-making once elected (Besley, 2004;Messner and Polborn, 2004;Ferraz and Finan, 2011a;Kotakorpi and Poutvaara, 2011;Gagliarducci and Nannicini, 2013;Cerina and Deidda, 2017). Since local politiciansjust like most of usmay be assumed to have a positive marginal utility of money, they might have a personal, economic incentive to locate their municipality on the desired side of a population threshold implying higher remuneration. ...
Political economists have long maintained that politicians respond to both (re-)election and financial incentives. This article contributes to the latter literature by analysing whether, when and how local office-holders respond to the economic incentives embedded in exogenously imposed population thresholds leading to an increased number and remuneration of local politicians. Building on insights from the urban economics and public finance literatures, we argue that local politicians may strategically adjust fiscal and housing policies to stimulate in-migration when approaching a population threshold where their remuneration increases. Using data from all 589 Belgian municipalities over the period 1977–2016, our results confirm that approaching important population thresholds causes lower local tax rates and the granting of additional building permits (particularly for apartments). These policy changes occur early in the election cycle and, at least for housing policy, are restricted to incumbent mayors themselves expecting to benefit from crossing the population threshold.
... direct consequences of the audit (e.g., if the audit led to the incarceration of involved 27 Note that the magnitude of our findings is comparable with previous papers on political selection.For instance,Daniele and Geys (2015) andDaniele (2017) estimate a change in politicians' education due to mafia presence of about 35% of a standard deviation.Kotakorpi and Poutvaara (2011) find that a 35% increase in salary leads to a 5-percentage-point increase in candidates with high education. AppendixTable A.3 show that the results are similar if we only use as control those municipalities that have the auditing disclosure after the selection period. AppendixTable A.4 provides the results of changing the definition of ...
We use data from Canadian legislatures to examine how legislative pension rules affect the propensity of incumbents to seek re‐election. We predict that legislators with defined‐benefits pensions are more likely to seek re‐election than legislators without pensions. Once the legislator is vested (i.e., qualified) in the pension, however, this incentive disappears; indeed, pensions that accrue value quickly and can be collected at an early age, induce legislators to retire rather than seek re‐election. Difference‐in‐differences estimates bear out these predictions: on average, legislators with defined benefits pensions are 11 percentage points more likely to seek re‐election than legislators without pensions, whereas legislators who on vesting immediately qualify for a pension of 50% of their salary are 11 percentage points less likely to do so. These results show that legislative pensions alter the value that legislators place on re‐election and, in doing so, they affect the accumulation of legislative professionalism and the strength of democratic accountability.
This paper provides evidence for the importance of direct electoral processes by investigating the consequences for public spending of an unexpected reform that repealed direct elections for local (provincial) politicians in Italy. Direct elections were substituted with indirect ones, whereby directly elected municipal politicians choose a municipal mayor to serve as provincial president. Using a difference‐in‐differences strategy, I document two main consequences of the reform. First, municipalities connected to the provincial presidents tend to receive disproportionately more public funds after the reform, suggesting geographic favoritism increased. Second, the share of provincial resources spent on public goods drops in favor of bureaucratic costs. I discuss suggestive evidence that these results are driven by weaker electoral incentives rather than by the selection of worse politicians.
This paper studies the effect of different ballot structures in proportional representation systems on the educational attainment of elected politicians as a proxy for their “ability”. By exploiting the Italian electoral reform that switched from open to blocked lists of candidates, the difference-in-differences analysis shows that the reform lowered the educational attainment of national politicians compared to the counterfactual (regional politicians). The dynamic impact of the reform is persistent over time, and it is robust to several concerns. The estimates account for the changes in the party system due to the “Clean hands” judicial inquiry against political corruption that began in 1992. The voters’ choice of better politicians than political parties seems to be the most likely mechanism behind the results.
Would the quality of the local political class be higher if elected representatives were paid more? We answer this question by analysing a clear-cut natural experiment of a sizable salary increase for mayors in Italy approved at the end of 2021. Thanks to the adoption of a difference-in-discontinuity design implemented via a non-parametric robust bias-corrected estimator with covariate adjustment, we gauge the impact of the reform for municipalities just above or below the 5,000 inhabitants threshold, which corresponds to a sizable monthly wage increase for elected mayors. We find that the reform increased the educational quality of the elected mayor, while the impact on the quality of the executive committee and city council is noisy and it requires further investigations. There is also no impact on the level of competition, proxied by the change in the number of mayoral candidates, the margin of victory and the Herfindahl-Hirschman index.
By matching data on land transactions in China’s primary land market with detailed curriculum-vitae of board directors in publicly listed firms, we identify a pattern of ‘revolving door’ exchanges between local officials and firms. The officials discounted the price of land which they sold to the said firms, and were subsequently rewarded with board appointments upon retirement. Specifically, these ‘client-officials’ are three times as likely to be recruited by the ‘patron-firms’ as board directors and enjoy a salary that is 23% higher and 81% more company shares by comparison with directors who did not help firms to secure cheap land deals. All of these, however, are conditional on patron-firms being able to receive a price discount, which averaged 19.4% when they purchased them in normal times. However, when client-officials were constrained from providing a price discount during a surprise audit, the likelihood of client-officials recruited as board directors was halved, with the price discount and extra compensation received by the patrons and clients respectively vanishing altogether. By providing evidence of the reciprocal benefits received by both parties, we demonstrate that the revolving door is used as a ‘payment’ rather than a ‘connection’ device in the Chinese context.
Does political selection matter for policy in representative governments? I use administrative data on local politicians in Finland and exploit exogenous variation generated by close elections to show that electing more high-income, incumbent, and competent politicians (who earn more than observably similar politicians) improves fiscal sustainability outcomes but does not decrease the size of the public sector. I also provide suggestive evidence that electing more university-educated local councillors leads to more public spending without adverse effects on fiscal sustainability. I reconcile these findings with survey data on candidate ideology and demonstrate that different qualities are differentially associated with economic ideology.
Voters sometimes vote for seemingly less-qualified candidates. To explain this fact, we develop a political agency model with sequential elections in which a voter elects a politician among candidates with different competence (valence) levels, considering that politicians’ representation of voters’ preferences depends on their competence levels. We show that a negative relationship exists between politicians’ competence and their representation when a future challenger is likely to be incompetent and the reward for politicians is small. We also highlight voters’ private information on how they evaluate candidates’ competence, demonstrating that voters’ demand for incompetent candidates can be a self-fulfilling prophecy.
This paper documents an important but mostly overlooked reason for female underrepresentation in politics: gender gaps in the recontest likelihood of candidates. Using hand-collected data on 116,185 candidates in four consecutive local council elections (2001-2016) in a German state, we provide evidence for a gender recontest gap among both incumbent and non-incumbent candidates. Female candidates are 4 to 5 percentage points less likely than male candidates to run again conditional on previous candidacy. Studying mechanisms, we find that women are likely held back by incompatibilities between family obligations and political duties as well as a culture of male dominance in local politics.
We study how to efficiently motivate policy‐makers to solve political multitask problems. Political multitask problems typically have some outcomes that are difficult to measure. Moreover, there are conflicts among citizens about optimal policies and policy‐makers have the power to tax the citizens to invest in better outcomes for some tasks. We develop a political agency model with two tasks and only one measurable outcome. In such an environment, policy‐makers choose socially inefficient public good levels and expropriate minorities. A judicious combination of constitutional limits on taxation and incentive pay for policy‐makers is second‐best. Incentive pay is conditional on the public good level.
Using data on mayoral candidates and elected mayors in Italian municipalities, this paper aims to unveil the mechanism underlying the evidence that organized crime lowers politicians’ quality. We exploit the dissolution of city governments for presumed mafia infiltration as an exogenous shock to the presence of organized crime in local politics. We implement a difference-in-differences methodology to test whether organized crime discourages qualified individuals to run for elections. Our results indicate that the active presence of organized crime does not prevent highly qualified candidates from running but does induce citizens to vote for less qualified ones. The identification of the channel through which organized crime influences local politics is important to better direct public intervention against mafia infiltration.
Incumbents tend to gain solid electoral advantage in many voting systems. In this study, we examine the relationship between salaries prescribed to politicians and the incumbency advantage by exploiting a political wage reform and data from close elections in a proportional semi-open list system in the Czech Republic. We show that higher salaries reduce the average incumbency advantage, as they increase the probability to run again for previously non-elected candidates much more than for incumbents. Still, we find that higher wages improve candidate selection, especially by encouraging repeated candidacy from university-educated incumbents. Higher wages also improve relative positions of re-running incumbents on candidate lists compared to previously non-elected re-running candidates. Our results overall suggest that incumbency per se changes the relationship between political wages and candidate selection.
How do governors’ reelection motives affect policy experimentation? We develop a theoretical model of this situation, and then test the predictions in data on US state-level welfare reforms from 1978 to 2007. This period marked the most dramatic shift in social policy since the New Deal. Our findings indicate that governors with strong electoral support are less likely to experiment than governors with little support. Yet, governors who cannot be reelected actually experiment more than governors striving for reelection. These findings are robust to controlling for ideology, preferences for redistribution, the state legislature, and cross-state learning. (JEL D72, H75, I32, I38)
The paper estimates causal effects of being elected in a local election on monetary returns. The claim for causality is made in a research design where the income of some candidate who just barely won a seat is compared to that of some other candidate who was close to winning a seat for the same party, but ultimately did not. This research design is made possible thanks to a comprehensive, detailed data set covering all Swedish politicians who have run for office in the period 1991–2006. The analysis establishes that monetary returns from local politics are absent both in the short and long run. By relating this null result to effects on the future political career, the paper provides suggestive evidence that local politicians are not primarily motivated by money.
We study the relationship between the level of compensation and time use for US state legislators. Using survey data on time use, we show that higher salary is robustly associated with legislators spending more time on fundraising. In contrast, higher salary is also robustly associated with less time spent on legislative activities and has no clear relation to time spent on constituent services. The fundraising results are particularly strong for legislators who do not intend to run for higher office. Our results are consistent with an interpretation that higher salary raises the value of office, and politicians respond with more fundraising because increased fundraising raises the chance of getting re‐elected more than does increased legislative activity. Back‐of‐the‐envelope calculations suggest that a $30,000 increase in salary is associated with politicians annually devoting 13 more hours to fundraising and 18 fewer hours to legislative activity.
Résumé
Un temps pour faire les lois et un autre pour lever des fonds? Étude du rapport entre le salaire et l’emploi du temps des législateurs d’état . Dans cet article, nous examinons le lien entre le niveau de rémunération et l’emploi du temps des législateurs d’état aux États‐Unis. En nous appuyant sur plusieurs données d’enquêtes relatives à la gestion du temps, nous montrons que plus leur salaire est élevé, plus les législateurs ont tendance à consacrer du temps à lever des fonds, le temps dévolu aux activités législatives ayant, quant à lui, tendance à diminuer sans lien évident avec le temps passé en circonscription au service des citoyens. Les résultats relatifs aux levées de fonds sont particulièrement forts dès lors que les législateurs ne briguent pas de plus hautes fonctions, et sont conformes à l’interprétation selon laquelle un salaire élevé accroît l’intérêt pour une fonction. Et puisque l’augmentation des activités de financement ne se traduit pas par davantage d’activités législatives, mais par des chances de réélection accrues, les politiciens multiplient les levées de fonds. Des calculs rapides et approximatifs suggèrent qu’une hausse du salaire des politiciens de 30 000 $ par an représenterait 13 heures de collecte de fonds en plus, mais 18 heures d’activités législatives en moins annuellement.
An important question in representative democracies is how to ensure that politicians behave in the best interests of citizens rather than in their own private interests. One institutional device available to regulate the actions of politicians is their pay structure. This paper provides fresh insights into the impact of income on the performance of politicians using a unique law change implemented in Turkey in 2012. Members of parliament (MPs) in Turkey, who are retired from their pre‐political career jobs, earn a retirement pension on top of their MP salaries. A 2012 law significantly increased MPs’ pension earnings by pegging it to 18% of the President's salary, while keeping the earnings of non‐retired MPs unchanged. Using a difference‐in‐differences strategy, we find that the increase in earnings due to the 2012 law reduced the overall performance of retired MPs, as measured by legislative activities, by 12.3% of a standard deviation. We find that the law change also reduced MPs’ attendance at parliamentary sessions. Given the design features of the Turkish reform, we believe that it is the increase in demand for leisure, not selection and re‐election incentives, that serves as the main explanation for our finding.
In this paper, I study how wages earned by local politicians affect local government quality. To identify the effects, I use caps imposed by the Peruvian central government on mayoral wages as an excluded instrument. The results show that mayoral wages do not improve government performance. In particular, there is a negative impact on public investment implementation and on performance goals set by the central government. Moreover, there is no evidence of a positive effect on politician selection, municipal bureaucratic capacity, and political effort. Wages do strongly affect the local political landscape, increasing political competition and reducing political support for the mayor. These changes may help explain the drop in performance as local authorities may face more political obstacles when implementing their policy agenda. Overall, the results show that higher politician wages need not improve local government quality.
Motivation: To study factors affecting changes in the wealth of people performing the functions of members of voivodeship assemblies.Aim: To fill the existing research gap by conducting a quantitative analysis of data collected from asset declarations of all councillors of voivodeship assemblies in Poland from the 2010–2014 term, in particular an analysis of declared assets.Results: The analysis of data clearly indicates that councillors belonging to the coalition ruling a given assembly in a given term accumulate wealth faster that opposition councillors. More detailed results also imply that the results cannot be explained by differences in sex, age or place of work between councillors of the specific political parties. The reason of the higher pace of growth of assets of coalition councillors may be their access to official positions in the public sector or having well-paid jobs.
How does availability of education affect who becomes a political representative? Theorists have pointed out that access to education is a key to a well-functioning democracy, but few empirical studies have examined how changes in the access to education influence the chances of becoming a politician. In this paper, we analyze the effects of a large series of school openings in Sweden during the early 20th century, which provided adolescents with better access to secondary education. We use administrative data pertaining to the entire Swedish population born between 1916 and 1945. According to our empirical results, the opening of a new lower secondary school in a municipality increased the baseline probability of running for political office by 10–20%, and the probability of holding office by 20–30%.
We provide a model of self-selection by candidates in a probabilistic voting environment to shed light on the forces shaping the quality of politicians from both the supply and demand sides of politics. The model highlights the idea that the patterns of selection and the comparative statics of politician quality depend critically on how the costs of running for office vary for candidates with different qualities. The model offers predictions on how the quality of the political class will vary with key parameters pertaining to both the supply and demand for candidates. We use the model to frame a review of the empirical literature on political selection that has emerged over the past two decades. We contrast areas where significant progress has been made with others where important theoretical predictions remain untested or existing evidence does not allow a consensus, highlighting areas for future research. Expected final online publication date for the Annual Review of Economics Volume 10 is August 2, 2018. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.
In choosing environmental policy, governments rely on information provided by bureaucrats, who may have a political motivation of their own. We analyze the ensuing principal–agent relationship and derive the government's optimal contract. We find that a regulatory agent who is more environmentalist than the government is rewarded for truthfully stating that the environmental impact of the regulated economic activity is low (and vice versa). The bureaucrat has a stronger influence on policy if there is greater uncertainty about the environmental impact, or if the policy choice has a strong weight in his utility function. For some impact values, the bureaucrat is permitted to set his own preferred policy, which is a form of optimal delegation.
In 2004, a section was added to the German Protection against Dismissal Act, establishing a new procedure to dismiss an employee, given a predetermined severance payment. Most legal scholars presume the change to be without impact, while a minority of experts claims it to be either beneficial or unfavorable to employees. Our theoretical model suggests that firms will use the new procedure, but that the change in payoffs is indeterminate and, therefore, an empirical issue. Exploiting the fact that collective dismissals are not directly affected by the amendment, difference-in-differences estimates based on panel data for West Germany indicate that the legal change did have a negative effect on severance pay.
Are natural resources a "curse" or a "blessing"? The empirical evidence suggests that either outcome is possible. This paper surveys a variety of hypotheses and supporting evidence for why some countries benefit and others lose from the presence of natural resources. These include that a resource bonanza induces appreciation of the real exchange rate, deindustrialization, and bad growth prospects, and that these adverse effects are more severe in volatile countries with bad institutions and lack of rule of law, corruption, presidential democracies, and underdeveloped financial systems. Another hypothesis is that a resource boom reinforces rent grabbing and civil conflict especially if institutions are bad, induces corruption especially in nondemocratic countries, and keeps in place bad policies. Finally, resource rich developing economies seem unable to successfully convert their depleting exhaustible resources into other productive assets. The survey also offers some welfare-based fiscal rules for harnessing resource windfalls in developed and developing economies. (JEL O47, Q32, Q33)
During the last three decades there has been an almost continuous undermining of the public interest by private interests operating either outside or inside Greek public administration. The result of this infiltration has been a gradual loss of bureaucratic autonomy to pursue the public interest. The web of relationships developed between private interests and the two dominant political parties have eroded both the efficacy of public administration and the dynamism of the private sector as incumbent firms and public (or quasi-public) sector functionaries have been using their power to prevent the birth of new firms and to raid the state coffers. The upshot of these have been the emergence of permanently large budget and current account deficits, which have in turn driven Greece’s foreign indebtedness to alarming levels, necessitating the current bailout by the EU/ECB/IMF.
We investigate the role of workers’ and managerial experience as a determinant of firm innovation and productivity in a sample of Italian manufacturing firms. A high share of temporary – thus un-experienced - workers is associated to low innovation and productivity. The effect of managerial experience measured by age on firm performance depends instead on the type of firm: high age of managers and board members is bad for innovation and productivity growth, while costs and benefits of old managerial age cancel out for non-innovative firms.
In this paper we treat an individual’s health as a continuous variable, in contrast to the traditional literature on income insurance, where it is regularly treated as a binary variable. This is not a minor technical matter; in fact, a continuous treatment of an individual’s health sheds new light on the role and functioning of income insurance and makes it possible to capture a number of real-world phenomena that are not easily captured in binary models. In particular, moral hazard is not regarded as outright fraud, but as a gradual adjustment of the willingness to go to work when income insurance is available. Further, the model can easily encompass phenomena such as administrative rejection of claims and the role of social norms. It also gives a rich view of the desirability of insurance in the first place.
A puzzling but consistent result in the empirical literature on banking is that firms with close bank ties do not grow faster than bank-independent firms. In this paper, we reconsider the link between relationship lending and firms’ growth, distinguishing firms by size and “health”. The idea is that the beneficial effects of relationship lending on information asymmetries can be compensated by other negative capture, risk and externality effects which make relational banks reluctant to support long-term growth projects of client firms, and that the strength of these compensating effects varies with firm size and health status. We explore the influence of long-lasting bank relationships on employment and asset growth of a large sample of Italian firms. The main finding is that relationship lending hampers the efforts of small firms to increase their size, while it mitigates the negative growth of troubled, medium-large enterprises.
In this paper we explore the relationship between an equitable distribution of the cost shares in public-good provision on the one hand and the core property of an allocation on the other. In particular we show that it is an inhomogeneous distribution of cost shares that motivates some coalition of agents to separate and to block an initially given Pareto optimal allocation which can be interpreted as the outcome of a negotiation process when all agents form a grand coalition. Distributional equity of the individual burdens of public-good contribution is assessed by a specific sacrifice measure (the “Moulin sacrifice”) which is derived from the egalitarian-equivalent concept suggested by Moulin (1987). We also develop a simple core test by which it can be checked whether a given allocation is in the core thus being a possible outcome of a cooperative agreement in the public-good economy.
In the past two decades privatisation and liberalisation of network industries providing services of general economic interest (SGEI), have been particularly significant in the European Union. Wide variations around a common policy trend can, however, be observed across countries and sectors. We focus on electricity and gas sectors because energy sectors have usually been profit makers, not affected by direct government transfers, in contrast to other SGEI. We study the effects of privatisation and other reforms on consumer prices using both subjective data on consumers’ perception of utility prices and data on average prices paid.
We introduce tax competition for mobile labor into an optimal-taxation model with two skill levels. We analyze a symmetric subgame-perfect Nash equilibrium of the game between two governments and two taxpayer populations. Tax competition reduces the distortion from the informational asymmetry and increases employment of the less productive individuals. When countries are heterogeneous, this effect is more pronounced in the smaller country.
This paper uses a particular school exit rule previously in effect in England and Wales that allowed students born within the first five months of the academic year to leave school one term earlier than those born later in the year. Focusing on women, we show that those who were required to stay on an extra term more frequently hold some academic qualification. Using having been required to stay on as an exogenous factor affecting academic attainment, we find that holding a (low level) academic qualification has no effect on a women's probability of being married, but increases the probability of her husband holding some academic qualification and being economically active.
Ogawa et al. (J. Urban Econ. 60:350, 2006) analyze capital tax competition in a fixed-wage approach and show that the original results of Zodrow and Mieszkowski (J. Urban Econ. 19:356, 1986) are not preserved in the presence of unemployment. In the present paper, we challenge this view and investigate capital tax competition for some arbitrary institutional setting of the labor market. We find that if the labor market is characterized by some efficient bargaining solution, the results of Zodrow and Mieszkowski (J. Urban Econ. 19:356, 1986) are preserved.
Empirical evidence that migrants send home more remittances after disasters raises the question of whether remittances can be used to self-insure, substituting for both formal and informal insurance. We investigate this question using a unique data set on the usage patterns of financial services by households in South Africa. We show that the likelihood that a respondent has a formal funeral cover increases with income and banking status. However, it is lower for individuals receiving remittances, which supports the idea that remittances act as (self-) insurance. We also show that purchasing formal funeral cover is influenced by other risk management strategies and that determinants of informal insurance differ from those of formal insurance.
We introduce a new hybrid approach to joint estimation of Value at Risk (VaR) and Expected Shortfall (ES) for high quantiles of return distributions. We investigate the relative performance of VaR and ES models using daily returns for sixteen stock market indices (eight from developed and eight from emerging markets) prior to and during the 2008 financial crisis. In addition to widely used VaR and ES models, we also study the behavior of conditional and unconditional extreme value (EV) models to generate 99 percent confidence level estimates as well as developing a new loss function that relates tail losses to ES forecasts. Backtesting results show that only our proposed new hybrid and Extreme Value (EV)-based VaR models provide adequate protection in both developed and emerging markets, but that the hybrid approach does this at a significantly lower cost in capital reserves. In ES estimation the hybrid model yields the smallest error statistics surpassing even the EV models, especially in the developed markets.
The principle that it is better to let some guilty individuals be set free than to mistakenly convict an innocent person is generally shared by legal scholars, judges and lawmakers of modern societies. The paper shows why this common trait of criminal procedure is also efficient. It extends the standard Polinsky and Shavell (2007) model of deterrence and shows that when the costs of convictions are positive, and guilty individuals are more likely to be convicted than innocent individuals it is always efficient to minimize the number of wrongful convictions, while a more than minimal amount of wrongful acquittals may be optimal.
This paper is concerned with empirical and theoretical basis of the Efficient Market Hypothesis (EMH). The paper begins with an overview of the statistical properties of asset returns at different frequencies (daily, weekly and monthly), and considers the evidence on return predictability, risk aversion and market efficiency. The paper then focuses on the theoretical foundation of the EMH, and show that market efficiency could co-exit with heterogeneous beliefs and individual irrationality so long as individual errors are cross sectionally weakly dependent in the sense defined by Chudik, Pesaran, and Tosetti (2010). But at times of market euphoria or gloom these individual errors are likely to become cross sectionally strongly dependent and the collective outcome could display significant departures from market efficiency. Market efficiency could be the norm, but it is likely to be punctuated with episodes of bubbles and crashes. The paper also considers if market inefficiencies (assuming that they exist) can be exploited for profit.
The standard model of strategic tax competition assumes that government policymakers are perfectly benevolent. We depart from this assumption by allowing policymakers to be influenced by the rent-seeking behavior of businesses. Campaign contributions may affect tax competition and enhance or retard the mobility of capital across jurisdictions. Based on a panel of 48 U.S. states and unique data on business campaign contributions, we find that contributions have a significant direct effect on tax policy, the economic value of a $1 business campaign contribution is nearly $4, the slope of the tax reaction function is negative, and the empirical results are sensitive to state effects.
This paper deals with the impact of electoral competition on politicians' outside earnings. In our framework, politicians face a tradeoff between allocating their time to political effort or to an alternative use generating outside earnings. The main hypothesis is that the amount of time spent on outside work is negatively related to the degree of electoral competition. We test this hypothesis using a new dataset on outside earnings of members of the German federal assembly. Taking into account the potential endogeneity of measures of political competition that depend on past election outcomes, we find that politicians facing low competition have substantially higher outside earnings.
The wage paid to elected officials affects both the self-selection of citizens willing to run for office and the performance of those who are appointed. On one side, if skilled individuals shy away from politics because of higher opportunities in the private sector, an increase in politicians’ pay might change their mind. On the other side, if the reelection prospects of incumbents depend on their in-office deeds, a higher wage might foster performance. We use data on all Italianmunicipalities from 1993 to 2005 to test these hypotheses in a quasi-experimental framework. In Italy, the wage of the mayor depends on population size and sharply changes at different thresholds. We apply a regression discontinuity design on the only threshold that uniquely identifies a wage change (1,000 inhabitants) to control for unobservable town characteristics. Exploiting the existence of a two-term limit, we further disentangle the selection from the incentive component of the impact of the wage on performance. The empirical esults show that a higher wage attracts more educated candidates, more entrepreneurs and self-employed, but less blue collars. At the same time, better-paid politicians are able to reduce taxes by raising more external funds, and to increase investments at the expense of current expenditure. Most of these effects are driven by selection rather than the incentive to be reelected.
We analyze the topical question of how the compensation of elected politicians affects the set of citizens choosing to run. To this end, we develop a sparse and tractable citizen-candidate model of representative democracy with ability differences, informative campaigning and political parties. Our results suggest that primaries, campaign costs and rewards have previously overlooked interactions that should be studied in a unified framework. Surprisingly, increasing the reward may lower the average candidate quality when the campaigning costs are sufficiently high. Copyright Springer Science + Business Media, LLC 2007
Recent studies have emphasized the importance of the quality of politicians for good government and consequently economic performance. But if the quality of leadership matters, then understanding what motivates individuals to become politicians and perform competently in office becomes a central question. In this paper, we examine whether higher wages attract better quality politicians and improve political performance using exogenous variation in the salaries’ of local legislators across Brazil’s municipal governments. The analysis exploits discontinuities in wages across municipalities induced by a constitutional amendment defining caps on the salary of local legislatures according to municipal population. Our main findings show that increases in salaries not only attracts more candidates, but more educated ones. Elected officials are in turn more educated and stay in office longer. Higher salaries also increase legislative productivity as measured by the number of bills submitted and approved, and the provision of public goods.
Political scientists have long been interested in the occupational decisions of politicians. Two events prior to the 1992 congressional elections brought journalists and the broader public into emotion-rich but data-poor discussions of how and why to achieve greater turnover in Congress. The House banking scandal gave rise to standard arguments that voters should "throw the bums out." An initially obscure provision in the Federal Election Campaign Act, which allowed certain grandfathered members personally to pocket their campaign war chests, gave rise to somewhat more sophisticated assertions about "buying the bums out." Using preelection data on incumbents' decisions to retire or seek reelection, we estimate the effects of these special features of the 1992 election while improving upon prior estimates of strategic retirements more generally. By embedding an explicit occupational choice model into a maximum-likelihood equation, we find strong evidence of strategic retirements, and we quantify precisely the turnover that can be attributed to rubber checks and golden parachutes.
Since World War II, divided government has become increasingly common in the American states. A significant component of the increase is the deterioration of Republican fortunes in state legislatures: after the 1990 and 1992 elections, for example, only five state legislatures were controlled by the Republicans. I shall examine the hypothesis that the professionalization of state legislatures makes legislative service more attractive to Democratic candidates and less attractive to Republican candidates, because full-time legislative service is incompatible with another career, and Democrats, on average, have less lucrative career opportunities than Republicans. Statistical analysis of post-World War II legislative elections outside the South is consistent with the argument: other things being equal, every ten-thousand-dollar increase in real biennial legislative compensation is associated with approximately a 1% increase in Democratic legislators.
Over two centuries ago, Adam Smith wrote of two passions that motivate those seeking public distinction: avarice and ambition. By investing these categories with appropriately concrete meaning, we develop a model of House members' career decisions. Like other individuals contemplating retirement options, politicians act with an eye to their financial interests, but not all financial interests are alike. The financial factor that matters most involves perennial considerations of post-retirement pension benefits, not fleeting opportunities to exploit ethically questionable sources of outside income. Second, we embed in the model a theory of intra-institutional ambition. Members impute value both to leadership positions they expect to retain and positions they expect to obtain. Majority members well-positioned to exert future legislative leverage are less likely to retire. Finally, several sources of electoral insecurity increase retirement probability. In the main, members may be reelection-seekers but will not pay any price to seek something they may not find.
This paper looks at the theory behind the idea that paying politicians better will improve their performance. The paper lays out a political agency model with adverse selection and moral hazard where politicians are subject to two-period term limits. This model provides a number of predictions about how the pay of politicians affects agency problems. We also consider what happens when the pool of politicians is endogenous. The main ideas in the model are confronted with data on U.S. governors. (JEL: D72, J33)
This paper reviews the literature on gender differences in economic experiments. In the three main sections, we identify robust differences in risk preferences, social (other-regarding) preferences, and competitive preferences. We also speculate on the source of these differences, as well as on their implications. Our hope is that this article will serve as a resource for those seeking to understand gender differences and to use as a starting point to illuminate the debate on gender-specific outcomes in the labor and goods markets.
This study analyses the impact of economic catching-up on annual inflation rates in the European Union with a special focus on the new member countries of Central and Eastern Europe. Using an array of estimation methods, we show that the Balassa-Samuelson effect is not an important driver of inflation rates. By contrast, we find that the initial price level and regulated prices strongly affect inflation outcomes in a nonlinear manner and that the extension of Engel's Law may hold during periods of very fast growth. We interpret these results as a sign that price level convergence comes from goods, market and non-market service prices. Furthermore, we find that the Phillips curve flattens with a decline in the inflation rate, that inflation is more persistent and that commodity prices have a stronger effect on inflation in a higher inflation environment.
Rethinking the foundations of Heckscher-Ohlin theory when countries have different technologies, this paper shows how to make the proper adjustments for international productivity differences. The central tool is a factor conversion matrix that computes the local factor content of foreign Rybczynski effects. Factor-specific productivities are a special case of these more general linear relationships.
Two main career paths are prevalent among politicians in modern democracies: there are career politicians (i.e., politicians who work in the political sector until retirement), and political careers (i.e., there are politicians who leave politics before retirement and work in the private sector). In this paper, we propose a dynamic equilibrium model of the careers of politicians in an environment with a private sector and a political sector, where individuals are heterogeneous with respect to their market ability and political skills. Our analysis provides an explanation for the existence of career politicians and individuals with political careers, and their motivations. We also investigate the effects of monetary incentives and other features of the political–economic environment on the quality of politicians and their careers. We show that an increase in the salary a politician receives while in office decreases the average quality of individuals who become politicians, decreases turnover in office, and may either decrease or increase the average quality of career politicians.
We consider a society that has to elect an official who provides a public service for the citizens. Potential candidates differ in their competence and every potential candidate has private information about his opportunity cost to perform the task of the elected official. We develop a new citizen candidate model with a unique equilibrium to analyze citizens' candidature decisions. Under some weak additional assumptions, bad candidates run with a higher probability than good ones, and for unattractive positions, good candidates free-ride on bad ones. We also analyze the comparative static effects of wage increases and cost of running on the potential candidates' entry decisions.
This paper provides a model that can account for the almost uniform staggering of wage contracts in some countries as well as for the markedly nonuniform staggering in others. In the model, short and long contracts as well as long contracts concluded in different periods are strategic substitutes, which provide a powerful rationale for staggering. We show that for realistic parameter values, there is a continuum of possible equilibria with various degrees of staggering of long contracts. If the contracting cost is not too large, then the lowest possible degree of staggering decreases with the contracting cost and increases with monetary uncertainty.
Recent empirical findings by and document a U-shaped effect of market concentration on relationship lending which cannot be easily accommodated by the investment and strategic theories of bank lending orientation. In this paper, we suggest that this non-monotonicity can be explained by looking at the organizational structure of local credit markets. We provide evidence that marginal increases in interbank competition are detrimental to relationship lending in markets where large and out-of-market banks are predominant. By contrast, where relational lending technologies are already widely in use in the market by a large group of small mutual banks, an increase in competition may drive banks to further cultivate their extensive ties with customers.
Most papers that employ Differences-in-Differences estimation (DD) use many years of data and focus on serially correlated outcomes but ignore that the resulting standard errors are inconsistent. To illustrate the severity of this issue, we randomly generate placebo laws in state-level data on female wages from the Current Population Survey. For each law, we use OLS to compute the DD estimate of its "effect" as well as the standard error of this estimate. These conventional DD standard errors severely understate the standard deviation of the estimators: we find an "effect" significant at the 5 percent level for up to 45 percent of the placebo interventions. We use Monte Carlo simulations to investigate how well existing methods help solve this problem. Econometric corrections that place a specific parametric form on the time-series process do not perform well. Bootstrap (taking into account the autocorrelation of the data) works well when the number of states is large enough. Two corrections based on asymptotic approximation of the variance-covariance matrix work well for moderate numbers of states and one correction that collapses the time series information into a "pre"-and "post"-period and explicitly takes into account the effective sample size works well even for small numbers of states.
This paper provides a survey on studies that analyze the macroeconomic effects of intellectual property rights (IPR). The first part of this paper introduces different patent policy instruments and reviews their effects on R&D and economic growth. This part also discusses the distortionary effects and distributional consequences of IPR protection as well as empirical evidence on the effects of patent rights. Then, the second part considers the international aspects of IPR protection. In summary, this paper draws the following conclusions from the literature. Firstly, different patent policy instruments have different effects on R&D and growth. Secondly, there is empirical evidence supporting a positive relationship between IPR protection and innovation, but the evidence is stronger for developed countries than for developing countries. Thirdly, the optimal level of IPR protection should tradeoff the social benefits of enhanced innovation against the social costs of multiple distortions and income inequality. Finally, in an open economy, achieving the globally optimal level of protection requires an international coordination (rather than the harmonization) of IPR protection.
We analyze the effect of European Union (EU) membership on financial dollarization for the Central and Eastern European countries. Using a unique monthly dataset that spans about two decades, we find that both the accession process toward EU membership and EU entry have a direct impact on deposit and loan dollarization. EU membership reduces deposit dollarization while it increases loan dollarization. The negative effect on deposit dollarization captures the increased confidence of the private sector in the domestic currency as they consider the EU admission process to reflect their government’s commitment in promoting policies of long-run currency stability. The positive impact on credit dollarization is the outcome of a greater convergence of exchange rates to the euro and the subsequent anticipation for a lower currency risk, which diminishes the cost of foreign currency borrowing.
The paper studies the revenue, efficiency, and distributional implications of a simple strategy of offsetting tariff reductions with increases in destination-based consumption taxes so as to leave consumer prices unchanged. We employ a dynamic micro-founded macroeconomic model of a small open developing economy, which features an informal sector that cannot be taxed, a formal agricultural sector, and an import-substitution sector. The reform strategy increases government revenue, imports, exports, and the informal sector. In contrast to Emran and Stiglitz (2005), who ignore the dynamic effects of taxes and tariffs on factor markets, we find an efficiency gain, which is unevenly distributed. Existing generations benefit more than future generations, who - depending on pre-existing tax and tariff rates and the informal sector size - even may become worse off.
Teachers differ greatly in how much they teach their students, but little is known about which teacher attributes account for this. We estimate the causal effect of teacher subject knowledge on student achievement using within-teacher within-student variation, exploiting a unique Peruvian 6th-grade dataset that tested both students and their teachers in two subjects. We circumvent omitted-variable and selection biases using student and teacher fixed effects and observing teachers teaching both subjects in one-classroom-per-grade schools. After measurement-error correction, one standard deviation in subject-specific teacher achievement increases student achievement by about 10 percent of a standard deviation.
Recent empirical studies suggest a need for a flexible patent regime responding to industry characteristics. In practice, sector-specific modifications of patent strength already exist but lack theoretical foundation. This paper intends to make up for this neglect by scrutinizing in what direction industry characteristics influence optimal patent strength. It is found that patents ought to be weaker, the more intense competition, the higher R&D productivity, and the more intricate reverse engineering are. Unlike similar step-by-step innovation models of economic growth, the model assumes Cournot competition and introduces an empirically substantiated measure of sector differences in the ability to catch up with the technological leader. It is found that for most empirically plausible cases the familiar inverted-U relation between patent length and growth carries over to the Cournot set-up.
We study the effect of introducing a less transparent tax tool for the financing of local governments. A political agency model suggests that politicians with stronger re-electoral incentives would raise more tax revenues and use more the less transparent tax tool to enhance their probability of re-election. This prediction is tested by studying a reform that in 1999 allowed Italian municipalities to partially substitute a more accountable source of tax revenue (the property tax) with a less transparent one (a surcharge on the personal income tax of residents). Exploiting the existence of a term limit for mayors, we use a Difference in Difference approach, to estimate how mayors facing re-electoral concerns reacted to the introduction of the less transparent tax tool compared to mayors facing term limit. We find results in line with theory. We also show that the reduction in the property tax is larger in smaller municipalities and in municipalities with lower level of social capital. The normative implications are then discussed.
This paper provides a survey on studies that analyze the macroeconomic effects of intellectual property rights (IPR). The first part of this paper introduces different patent policy instruments and reviews their effects on R&D and economic growth. This part also discusses the distortionary effects and distributional consequences of IPR protection as well as empirical evidence on the effects of patent rights. Then, the second part considers the international aspects of IPR protection. In summary, this paper draws the following conclusions from the literature. Firstly, different patent policy instruments have different effects on R&D and growth. Secondly, there is empirical evidence supporting a positive relationship between IPR protection and innovation, but the evidence is stronger for developed countries than for developing countries. Thirdly, the optimal level of IPR protection should tradeoff the social benefits of enhanced innovation against the social costs of multiple distortions and income inequality. Finally, in an open economy, achieving the globally optimal level of protection requires an international coordination (rather than the harmonization) of IPR protection.
The Generalized Calvo and the Generalized Taylor model of price and wage-setting are, unlike the standard Calvo and Taylor counter-parts, exactly consistent with the distribution of durations observed in the data. Using price and wage micro-data from a major euro-area economy (France), we develop calibrated versions of these models. We assess the consequences for monetary policy transmission by embedding these calibrated models in a standard DSGE model. The Generalized Taylor model is found to help rationalizing the hump-shaped response of inflation, without resorting to the counterfactual assumption of systematic wage and price indexation.
Using data from the Health Survey for England and the English Longitudinal Study on Ageing, we estimate the causal effect of schooling on health. Identification comes from two nation wide increases in British compulsory school leaving age in 1947 and 1973, respectively. Our study complements earlier studies exploiting compulsory schooling laws as source of exogenous variation in schooling by using biomarkers as measures of health outcomes in addition to self-reported measures. We find a strong positive correlation between education and health, both self-rated and measured by blood fibrinogen and C-reactive protein levels. However, we find ambiguous causal effects of schooling on women's self-rated health and insignificant causal effects of schooling on men's self-rated health and biomarker levels in both sexes.
When accidental bequests signal otherwise unobservable individual characteristics such as productivity and longevity, the tax administration should partition the population into two groups: One consisting of people who do not receive an inheritance and the other of those who do. The first tagged group gets a second-best tax à la Mirrlees; the second group a first-best tax schedule. The solution implies that receiving an inheritance makes high-ability types worse off and low-ability types better off. High-ability individuals will necessarily face a bequest tax of more than 100%, while low-ability types face a bequest tax that can be smaller as well as larger than 100% and may even be negative.
We provide the first empirical analysis of gubernatorial pay. Using U.S. data for 1950-90, we document substantial variation in the wages of politicians, both across states and over time. Gubernatorial wages respond to changes in state income per capita and taxes. We estimate that governors receive a 1 percent pay cut for each 10 percent increase in per capita tax payments and a 4.5 percent increase in pay for each 10 percent increase in income per capita in their states. There is evidence that the tax elasticity reflects a form of "reward for performance." The evidence for the income elasticity of pay is less conclusive but is suggestive of "rent extraction" motives. Finally, we find that democratic institutions play an important role in shaping pay. For example, voter initiatives and the presence of political opposition significantly reduce the income elasticity of pay and increase tax elasticities of pay.
This paper develops an approach to the study of democratic policy-making where politicians are selected by the people from
those citizens who present themselves as candidates for public office. The approach has a number of attractive features. First,
it is a conceptualization of a pure form of representative democracy in which government is by, as well as of, the people. Second, the model is analytically tractable, being able to handle multidimensional issue and policy spaces very
naturally. Third, it provides a vehicle for answering normative questions about the performance of representative democracy.
In Finnish manufacturing, the gender wage gap more than doubles during the first ten years in the labour market. This paper studies the factors contributing to the gender gap in early-career wage growth. The analysis shows that the size of the gender gap in average wage growth varies with mobility status, the gap being higher with employer changes compared to wage growth within firms. Several explanations for the gender gap in wage growth based on human capital theory and theory of compensating wage differentials are considered. However, much of the gap in wage growth remains unexplained. The distributional analysis of the wage growth shows that the female wage penalty increases significantly as we move along the conditional wage growth distribution, the increase being stronger with employer changes compared to within-firm wage growth.
This paper deals with the impact of electoral competition on politicians´ outside earnings. We propose a simple theoretical model with politicians facing a tradeoff between allocating their time to political effort or to an alternative use generating outside earnings. The model has a testable implication stating that the amount of time spent on outside work is negatively related to the degree of electoral competition. We test this implication using a new dataset on outside earnings of members of the German federal assembly. Taking into account the potential endogeneity of measures of political competition that depend on past election outcomes, we find that politicians facing low competition have substantially higher outside earnings.