The Real Effects of Politicians' Compensation

Abstract

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 stronger firm and job creations and increases in firms' revenues and investments. Better paid legislators increase the municipality's budget surplus while increasing expenditure in education and health care. Our evidence is consistent with local legislators affecting firms mainly through improvements in fiscal policy.

Keywords: Politician Salary, Business Activity, Firm Creation, Job Creation, Revenues, Investments

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