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

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

Abstract

Why are public-sector workers so heavily compensated with pensions and other non-pecuniary benefits? In this paper, we present a political economy model of shrouded compensation in which politicians compete for taxpayers' and public employees' votes by promising compensation packages, but some voters cannot evaluate every aspect of compensation. If pension packages are "shrouded," meaning that public-sector workers better understand their value than ordinary taxpayers, then compensation will be inefficiently 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. Central control over dispersed municipal pensions has two offsetting effects on pension generosity: more state-level media attention helps taxpayers better understand pension costs, which reduces pension generosity; but a larger share of public sector workers will live within the jurisdiction, which increases pension generosity. We discuss pension arrangements in two decentralized states (California and Pennsylvania) and two centralized states (Massachusetts and Ohio) and find that in these cases, centralization appears to have modestly reduced pension arrangements; but, as the model suggests, this finding is unlikely to be universal.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18976.

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Date of creation: Apr 2013
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Publication status: published as Shrouded Costs of Government: The Political Economy of State and Local Public Pensions , Edward L. Glaeser, Giacomo A. M. Ponzetto. in Retirement Benefits for State and Local Employees: Designing Pension Plans for the Twenty-First Century , Clark, Rauh, and Duggan. 2014
Handle: RePEc:nbr:nberwo:18976

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  1. Ponzetto, Giacomo AM, 2011. "Heterogeneous Information and Trade Policy," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8726, C.E.P.R. Discussion Papers.
  2. 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, MIT Press, MIT Press, vol. 120(4), pages 1283-1330, November.
  3. Xavier Gabaix & David Laibson, 2005. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," NBER Working Papers 11755, National Bureau of Economic Research, Inc.
  4. 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.
  5. Freeman, Richard B, 1986. "Unionism Comes to the Public Sector," Journal of Economic Literature, American Economic Association, vol. 24(1), pages 41-86, March.
  6. 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.
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Cited by:
  1. Andrew Ang & Richard C. Green & Yuhang Xing, 2013. "Advance Refundings of Municipal Bonds," NBER Working Papers 19459, National Bureau of Economic Research, Inc.

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