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Pay for Politicians and Candidate Selection: An Empirical Analysis

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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.

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... 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. ...
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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. ...
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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). ...
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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. ...
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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.
... Following prior research (e.g., Angrist & Guryan, 2008;Baltrunaite et al., 2014;Kotakorpi & Poutvaara, 2011;Ng & Feldman, 2009), our preregistered proxy for applicant quality was education level, which is frequently used as an explicit qualification in hiring contexts (Gallagher, 2018). 7 We preregistered OLS regressions predicting applicant education level from condition (see additional online Table S6; Kirgios et al., 2024), but here we opt to present a more intuitive exploratory (nonpreregistered) analysis approach in which we compare application rates across conditions for the subgroup of candidates with bachelor's degrees to assess the impact of treatment on highly qualified candidates. ...
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Many organizations struggle to attract a demographically diverse workforce. How does adding a measurable goal to a public diversity commitment—for example, “We care about diversity” versus “We care about diversity and plan to hire at least one woman or racial minority for every White man we hire”—impact application rates from women and racial minorities? Extant psychological theory offers competing predictions about how historically marginalized applicants might respond to such goals. On one hand, measurable diversity goals may raise belongingness concerns among marginalized group members who are uncomfortable with being recruited and hired based on their demographics. On the other, measurable goals might increase organizational attraction by signaling that marginalized group members are more likely to be hired. In a preregistered field experiment (n = 5,557), including measurable diversity goals in job advertisements increased application likelihood among marginalized group members—women and racial minorities—by 6.5%, without sacrifices to candidate quality. These field effects were primarily driven by White women, who were 10.5% more likely to apply after seeing a measurable diversity goal. Follow-up studies with women (total n = 893, preregistered) and racial minorities (total n = 865, preregistered) suggest that although measurable diversity goals signal a more instrumental approach to diversity, they also increase perceived strategic benefits and beliefs that the organization’s commitment is genuine among both groups, which in turn are tied to increased willingness to apply. We discuss the tensions marginalized group members face when evaluating organizational diversity initiatives.
... This level of parliamentary effort is known to depend on various individual attributes of MPs, including their experience (Braendle & Stutzer, 2013), seniority (Akirav, 2016) Moreover, the composition of the parliamentary legislative agenda is in uenced by factors like MPs' political inclinations (Brenton & Pickering, 2022), party cohesion (Chiou & Rothenberg, 2006), conservative tendencies (Russel et al., 2020), Euroscepticism (Closa & Maatsch, 2014), electoral competition (Frank & Stadelmann, 2021;Skazlic, 2021;Rasmussen, 2018;De Paola & Scoppa, 2011). Socio-economic backgrounds (Hayo & Neumeier, 2014), political loyalty (Galasso & Nannicini, 2011), as well as the size and salary levels of parliamentary bodies (Kotakorpi & Poutvaara, 2011), also contribute to shaping the legislative agenda. ...
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This paper explores the phenomenon of party switching in the Italian parliament, wherein elected politicians frequently shift allegiance from one party to another, often at the expense of voter representation. Analyzing data on parliamentarians spanning 2008 to 2013 and utilizing an instrumental variable approach, the study reaffirms existing literature highlighting the influence of historical institutions on cultural beliefs and norms. These enduring legacies, passed down across generations, significantly impact the establishment, framework, and operation of current institutions. The manuscript specifically reveals that politicians elected in regions historically linked to enduring feudal values from pre-unitary kingdoms are more prone to defection and changing political affiliations. This tendency to switch parties reflects specific social norms and institutional influences deeply rooted in established clientelist practices. Ultimately, the evidence presented underscores how parliamentarians' defection diminishes legislative productivity, substituting particular interests for the nation's welfare. In summary, these findings demonstrate the persistent impact of informal cultural values originating from centuries-old institutions, shaping incentives and behaviors in contemporary politics despite the absence of formal institutional changes. JEL Codes: D72; K16
... A growing body of research has documented relevant differences in policy making depending on the gender of the politician, which arise as a mixture of differences in policy priorities (Besley & Coate, 1997) and a potential better qualification of females that achieve power positions (Kotakorpi & Poutvaara, 2011), which depend, among others, on outside options and political wages (Gagliarducci & and Nannicini, 2013). 1 Despite important progresses in recent years, females are still underrepresented in power positions. Seniority bias within party organizations (Cirone et al., 2023), social roles (Teele et al., 2018) and voter bias against females (Le Barbanchon & Sauvagnat, 2022) have been shown to dampen women's career advancement in politics. ...
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What are the effects of gender quotas on the educational composition of municipality councils? Despite abundant research on the effects of gender quotas on political outcomes, it is yet unclear how they affect the educational attainment of elected male and female councilors. This paper provides novel evidence on this matter for Spain using data for 119,567 elected municipal councilors in the local elections of 2003, 2007, 2011 and 2015. We adopt a difference in discontinuities research design that compares outcome values before and after the quota implementation in municipalities below and above the quota population threshold. Our results show that the quota has not had a significant effect on the average years of schooling of male and female municipal councilors, on average. While ensuring greater female representation, gender quotas are thus found to be neutral with respect to politicians’ competence.
... There is also an extensive empirical literature about the determinants of politicians' quality. Two features of our model that have been shown empirically to matter for politicians' quality are the political wage (Ferraz & Finan, 2009;Gagliarducci & Nannicini, 2013;Kotakorpi & Poutvaara, 2011;Dal Bó et al., 2013;Fisman et al., 2015), and the outside option Gagliarducci et al. (2010); Fedele and Naticchioni (2016); Grossman and Hanlon (2014)), 4 Our main contributions are as follows. First, we show that the quality of the polity is increasing in the power of the valence signal. ...
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We expand the theory of politician quality in electoral democracies with citizen candidates by supposing that performance while in office sends a signal to the voters about the politician’s valence. Individuals live two periods and decide to become candidates when young, trading off against type-specific private wages. The valence signal increases the reelection chances of high valence incumbents (screening mechanism of reelection), and thus their expected gain from running for office (self-selection mechanism). Since self-selection improves the average quality of challengers, voters become more demanding when evaluating the incumbent’s performance. This complementarity between the self-selection and the screening mechanisms may lead to multiple equilibria. We show that more difficult and/or less variable political jobs increase the politicians’ quality. Conversely, societies with more wage inequality have lower quality polities. We also show that incumbency advantage blurs the screening mechanism by giving incumbents an upper-hand in electoral competition and may wipe out the positive effect of the screening mechanism on the quality of the polity.
... But what, exactly, is ability for a politician? Studies have frequently used politicians' formal education as a proxy for their ability (Ferraz and Finan, 2009;Galasso and Nannicini, 2011;Kotakorpi and Poutvaara, 2011;Fisman et al., 2015). However, results are not unequivocal. ...
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Can democracies attract and elect politicians who are both high-ability and from diverse backgrounds? Using data covering the entire Danish population, including every candidate for local and national elections in 1990–2015, we explore the selection of political candidates. We show that Danish candidates and elected politicians have higher ability than the voters they represent, that selection on ability reflects individual skills rather than social background, that politicians are selected from economically diverse backgrounds, and that there is no substantial trade-off between ability and representation. Furthermore, we utilize a major structural reform, which significantly reduced the number of municipalities in Denmark, to show that increased political competition did not affect politicians’ ability, economic background, or the trade-off between the two.
... However, a theoretical contrast suggests that subjective experiences shape perceptions. Leaders who are distant from their home country's higher education systems end up being less aware of local needs and deficiencies, and potentially adapt outward-looking economic strategies [22,23]. ...
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It is increasingly recognised in the economic literature that political leader is a major actor in the development process of his country. As public resources become scarce against growing needs due to demographic pressure, leaders are faced with the trade-off between development policies. Hence the need to determine the factors motivating their public policy preferences. This paper focuses on the intrinsic motivations, including the leader’s background, in health policy outcomes. In a sample of 31 African countries over the period 1984-2015, for a total of 134 leaders, we show through fixed and random effect, OLS and GCM, Drisc/Kraay and GMM methods that high educated leaders preside over periods of increased life expectancy. However, their place of education, especially foreign western education, confronts them with numerous constraints, making the effect of their stay in the West on the health status of their native country negative. The study contributes to the emerging literature on political leaders theory by providing further evidence that the background of the incumbent political ruler is likely to shape his or her economic policy preferences and hence health outcome.
... 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). ...
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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). ...
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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. ...
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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. ...
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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. ...
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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. ...
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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). ...
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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). ...
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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.
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The efforts of organized crime to affect the outcome of elections have been well documented. In the present paper, we exploit the staggered enforcement of Law 164/1991, an anticrime measure that mandates dissolution of the city council in the case of suspected mafia infiltration, to show that political competition in municipal elections in Italy, measured by the win margin between the two “strongest” candidates and the Herfindahl index, increases sharply in the first election following a compulsory administration in dissolved municipalities compared to the control group of municipalities that have never been subject to council dissolution. We find that this effect of the anti‐mafia policy remains slightly significant up to the third election after dissolution, after which time it disappears. The paper suggests that mafias manipulate electoral outcomes principally by affecting voter behaviour, rather than by discouraging unfriendly candidates. We investigate several channels that might be driving these results.
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Traditionally, the Finnish party system has involved a high level of fragmentation yet remarkable stability, consensual decision-making, ideologically broad government coalitions, and mostly modest levels of polarization between parties or voters. These features suggest a limited effect of the party composition of government on economic policy. However, based on studies on close local elections, parliamentary speech, and party manifestos, we argue that the link between party politics and policy outcomes likely plays a role in Finland. Most analyses have examined the extent to which the characteristics of local politicians within the parties affect policy outcomes. These studies show that occupation, education, experience, competence, and residential location of local politicians strongly affect local policies, indicating that, in general, politics matters for policy. We also discuss how consensual national politics may have contributed to the recent success of the populist challenger Finns Party. As a new major player, the party has emphasized the role of sociocultural issues and especially affective polarization, which represents a considerable paradigm shift from the catch-all party policies typical of Finland for many decades. It is thus possible that the link between politics and policy will become more pronounced in the future, motivating further research.
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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.
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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.
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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.
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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.
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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)
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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 1businesscampaigncontributionisnearly1 business campaign contribution is nearly 4, the slope of the tax reaction function is negative, and the empirical results are sensitive to state effects.
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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.
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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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
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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.
Article
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.
Article
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.
Article
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.
Article
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.