The Real Effects of Politicians' Compensation
51 Pages Posted: 27 Oct 2019 Last revised: 18 Aug 2020
Date Written: October 17, 2019
We study how politicians' compensation affects the real economy. Specifically, we investigate the effect of legislators' wages on business activity in Brazil. We identify our results using a constitutional amendment that established salary caps for legislators in a given municipality based on arbitrary population cutoffs. We find that higher politician wages are associated with increases in firm and job creation and firms' average startup investments. Better paid legislators increase the municipality's budget surplus while increasing expenditure in items that increase local economic productivity. Our evidence highlights the potential adverse effects on the private sector of lowering politicians' salaries.
Keywords: Politician Salary, Business Activity, Firm Creation, Job Creation, Revenues, Investments
JEL Classification: G30, G38, D61, D72, H50
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