Would you get monkeys if you paid peanuts? Whether devoting high wages to politicians pays off is an elusive and ever debated issue. Citizens are not able to set the compensation of the politicians at an optimal level; hence, public opinion on the matter ranges from loud cries against the high salaries of the political elite to the merit of big pays for having better profile politicians. In a recent paper entitled Do Better Paid Politicians Perform Better? Disentangling Incentives from Selection forthcoming in the Journal of the European Economic Association, Tommaso Nannicini (Department of Economics) and Stefano Gagliarducci (Università di Roma Tor Vergata) address this question and investigate whether better paid politicians also perform better. The authors conclude that higher salaries draw more able and better educated candidates into politics, and even the incumbent politicians perform better.
The authors focus on two channels. First, a raise in politicians' remuneration might attract more skilled individuals who would otherwise shy away from politics, since the opportunities in the private sector are better. Second, higher wages might incentivize incumbent politicians to perform better if their reelection prospects depend on how they fare while in the office. The authors find that higher wages attract better educated candidates and that better paid politicians show improved efficiency. A larger fraction of the performance gain is driven by the selection of more capable politicians rather than by the incentive to be reelected.
The authors evaluate the impact of politicians' remuneration in a quasi-experimental framework using a data set on all Italian municipal governments from 1993 to 2001. This framework is allowed for since the wage of the mayor does not increase consistently, but it rather varies by law at different brackets depending on the size of the population in a municipality. Such an institutional setting provides the authors with a source of exogenous variation. Comparing the mayors of towns immediately under and immediately above the 5.000 population threshold allows the authors to make use of a regression discontinuity approach to test whether higher wages attract individuals with higher opportunity costs and influence the performance of elected politicians.
The authors provide evidence that a 33% increase in mayoral wages at the 5,000 population threshold draws in candidates that have 6.4% more years of education with respect to the average schooling in municipalities between 3000 and 5000. Further evidence suggests that such a wage increase also modifies the composition of candidates' occupations and more white-collar such as lawyers and managers are drawn into mayoral candidacy.
Additionally, measuring politicians’ performance by taxes, tariffs and expenditures, the authors show that better paid politicians reduce the size of the municipal government. More concretely, in the municipal government of a better paid politician, the reduction in tariffs per capita is 86%, the reduction in investments is 11% and the reduction in current expenditures is 22%.
Lastly, exploiting the existence of a two-term limit on mayors, authors are able to disentangle the effect of wages on performance through enticement of more skilled politicians or through enhanced reelection incentives of the incumbents. Thus, the authors apply a diff-in-diff strategy to the sample of mayors who were elected for two consecutive terms and provide evidence that most of the effect of wage increase on performance is driven by the greater ex-ante competence of elected mayors rather than reelection incentives.