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Shrouded Costs of Government: Political Economy of State and Local Public Pensions Data

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  • Edward L. Glaeser
  • Giacomo A.M. Ponzetto

Abstract

Why do public-sector workers receive so much of their compensation in the form of pensions and other benefits? This paper presents a political economy model in which politicians compete for taxpayers' 'and government employees' votes by promising compensation packages, but some voters cannot evaluate every aspect of promised compensation. If pension packages are "shrouded," so that public-sector workers better understand their value than ordinary taxpayers, then compensation will be highly back-loaded. In equilibrium, the welfare of public-sector workers could be improved, holding total public-sector costs constant, if they received higher wages and lower pensions. Centralizing pension determination has two off-setting effects on generosity: more state-level media attention helps taxpayers better understand pension costs, and that reduces pension generosity; but a larger share of public-sector workers will vote within the jurisdiction, which increases pension generosity. A short discussion of pensions in two decentralized states (California and Pennsylvania) and two centralized states (Massachusetts and Ohio) suggests that centralization appears to have modestly reduced pensions, but, as the model suggests, this is unlikely to be universal.

Suggested Citation

  • Edward L. Glaeser & Giacomo A.M. Ponzetto, 2013. "Shrouded Costs of Government: Political Economy of State and Local Public Pensions Data," Working Papers 660, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:660
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    File URL: https://www.barcelonagse.eu/sites/default/files/working_paper_pdfs/660.pdf
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    References listed on IDEAS

    as
    1. Edward L. Glaeser & Giacomo A. M. Ponzetto & Jesse M. Shapiro, 2005. "Strategic Extremism: Why Republicans and Democrats Divide on Religious Values," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(4), pages 1283-1330.
    2. Xavier Gabaix & David Laibson, 2018. "Shrouded attributes, consumer myopia and information suppression in competitive markets," Chapters, in: Victor J. Tremblay & Elizabeth Schroeder & Carol Horton Tremblay (ed.), Handbook of Behavioral Industrial Organization, chapter 3, pages 40-74, Edward Elgar Publishing.
    3. Giacomo A. M. Ponzetto & Maria Petrova & Ruben Enikolopov, 2008. "The Dracula effect: voter information and trade policy," Economics Working Papers 1296, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2020.
    4. James Poterba & Steven Venti & David A. Wise, 2007. "The Changing Landscape of Pensions in the United States," NBER Working Papers 13381, National Bureau of Economic Research, Inc.
    5. Gyourko, Joseph & Tracy, Joseph, 1989. "Local public sector rent-seeking and its impact on local land values," Regional Science and Urban Economics, Elsevier, vol. 19(3), pages 493-516, August.
    6. Matthew Gentzkow, 2006. "Television and Voter Turnout," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(3), pages 931-972.
    7. Leeds, Michael A., 1985. "Property values and pension underfunding in the local public sector," Journal of Urban Economics, Elsevier, vol. 18(1), pages 34-46, July.
    8. Richard J. Arnott & Joseph E. Stiglitz, 1979. "Aggregate Land Rents, Expenditure on Public Goods, and Optimal City Size," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 93(4), pages 471-500.
    9. Giacomo A. M. Ponzetto, 2011. "Heterogeneous Information and Trade Policy," 2011 Meeting Papers 189, Society for Economic Dynamics.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Clemens, Jeffrey & Cutler, David M., 2014. "Who pays for public employee health costs?," Journal of Health Economics, Elsevier, vol. 38(C), pages 65-76.
    2. Andrew Chamberlain, 2015. "Are State Workers Overpaid? Survey Evidence from Liquor Privatization in Washington State," Journal of Labor Research, Springer, vol. 36(4), pages 347-388, December.
    3. Giacomo A. M. Ponzetto & Ugo Troiano, 2012. "Social capital, government expenditures, and growth," Economics Working Papers 1307, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2024.
    4. Cory Koedel & P. Brett Xiang, 2017. "Pension Enhancements and the Retention of Public Employees," ILR Review, Cornell University, ILR School, vol. 70(2), pages 519-551, March.
    5. Mark Davidson & William Kutz, 2015. "Grassroots austerity: municipal bankruptcy from below in Vallejo, California," Environment and Planning A, , vol. 47(7), pages 1440-1459, July.

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    More about this item

    Keywords

    public pensions; state and local government; imperfect information; elections; public sector unions;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Government: Health, Education, and Welfare
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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