Public Sector Efficiency and Political Incentives: Evidence from Government Wages, Employment, and Fiscal Decentralization

This paper examines how expansions of the public-sector wage bill and employment affect government performance when political incentives and institutional constraints shape bureaucratic behaviour. Using data for 41 emerging and developing economies over 1997-2019, we construct annual measures of public-sector efficiency based on frontier methods and analyses how different sources of payroll growth translate into subsequent efficiency. To distinguish politically discretionary payroll expansions from externally induced adjustments, we decompose wage-bill changes into a component driven by natural disasters and a residual component reflecting policy-driven variation. This distinction contrasts emergency-driven administrative responses with payroll growth more likely to reflect patronage, weak accountability, or soft budget constraints. We find that discretionary increases in the wage bill are systematically followed by declines in public-sector efficiency, whereas disaster-driven payroll changes have small and transitory effects. These effects are conditioned by fiscal decentralization and institutional quality: stronger governance and subnational accountability mitigate efficiency losses. The results contribute to the public choice literature on bureaucratic incentives and the political economy of government size.