Do Better Paid Politicians Perform Better? Disentangling Incentives from Selection

The wage paid to elected officials affects both the choice of citizens to run for office and the performance of those who are appointed. On the one hand, if skilled individuals shy away from politics because of higher opportunities in the private sector, an increase in politicians’ pay may change their mind. On the other hand, if the reelection prospects of incumbents depend on their in-office deeds, a higher wage may foster performance. We use data on all Italian municipalities from 1993 to 2007 to test these hypotheses in a quasi-experimental framework. In Italy, the wage of the mayor depends on population size and sharply increases at nine thresholds. We apply a regression discontinuity design to two thresholds that uniquely identify a wage increase (1,000 and 5,000 inhabitants) to control for unobservable town characteristics. Exploiting the existence of a two-term limit, we further disentangle the composition from the incentive component of the impact of the wage on performance. The empirical results show that a higher wage attracts more educated and high-skilled candidates, and that better paid politicians lessen the government machinery by reducing per-capita taxes, tariffs, and current expenditure, while leaving investments unchanged. Importantly, most of the performance effect is driven by the selection of better candidates, rather than the incentive to be reelected.