The Real Effects of Politicians' Compensation

Abstract

We study how politicians' compensation affects entrepreneurship. Specifically, we investigate the effect of legislators' wages on business creation in Brazil. We identify our results using a constitutional amendment that established salary caps for legislators based on arbitrary population cutoffs. Higher politician wages are associated with increases in firm and job creation and firms' average startup investments. Better paid legislators manage public resources more efficiently, bring more external funds to the municipality, and reduce political patronage, which allows them to spend a larger portion of the budget in the local economy. Our evidence highlights the positive spillovers that politician compensation can have on the local population's welfare.

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

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