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

  • Edward L. Glaeser
  • Giacomo Ponzetto

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.

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Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 660.

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Date of creation: Jun 2013
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Handle: RePEc:bge:wpaper:660
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  1. Laibson, David I. & Gabaix, Xavier, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," Scholarly Articles 4554333, Harvard University Department of Economics.
  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, vol. 120(4), pages 1283-1330, November.
  3. 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.
  4. Giacomo Ponzetto, 2011. "Heterogeneous Information and Trade Policy," Working Papers 596, Barcelona Graduate School of Economics.
  5. 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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