The Real Effects of Politicians' Compensation

Abstract

We study how politicians' compensation affects entrepreneurship and local labor markets by examining the impacts of population-based wage caps for elected municipal officials in Brazil. We find that higher wages for local elected offices are associated with increases in firm creation, job generation, and initial capital contributions for new establishments. We show that higher wages for municipal elective offices induce more accountability through increased political competition. Better-paid officials improve public administration's efficiency by reducing patronage use and increasing access to state funding. Our evidence highlights the positive spillovers of higher political wages on local economic activity, particularly in economically vulnerable settings.

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

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