The Real Effects of Politicians' Compensation

Abstract

We study how local government quality improvements affect firms' investment decisions. We identify our results exploring exogenous variation in elected municipal officials' salaries steaming from population-based wage caps in Brazil. In municipalities where elected officials earn higher salaries, entrepreneurs start more new businesses, hire more workers, and increase their initial capital outlays in new establishments. We show that higher wages induce more accountability through increased political competition. Better-paid officials improve public administration's quality by reducing patronage and increasing access to state funding. Our evidence highlights the positive spillovers of higher political wages on business activity, particularly in economically vulnerable settings.

Keywords: Politician Compensation, Local Economy, Firm Creation, Job Generation, Capital Investment

JEL Classification: G30, G38, D61, D72, H50