Thursday, 23 April 2009

Motivating politicians

It is often argued that governments which secure property rights, regulate entry less, and curb corruption are those which create the right incentives for economies to prosper. But while the virtues of good government for economic development and growth are widely acknowledged, it is more difficult to learn what determines the quality of government. One view in the literature argues that political institutions that restrict rent-seeking and promote electoral accountability shape the necessary incentives for good policy-making. However, political institutions can only partially explain the variation in the quality of government both across countries and over time. A complementary view is that the quality of policy-making depends on the honesty and competence of the political class. Recent empirical evidence suggests that leaders play an important role in enacting the right policies and affecting economic performance. One only has to think of Lee Kuan Yew in Singapore to get the point.

But if the characteristics of policy-makers matter, then a central question becomes, what attracts high quality politicians into office and what provides them with the incentives to perform according to voters preferences.

In a new NBER working paper Claudio Ferraz and Frederico Finan look at the effects of monetary incentives on the performance of politicians. Their paper is Motivating Politicians: The Impacts of Monetary Incentives on Quality and Performance, NBER Working Paper No. 14906, April 2009.

In this paper, Ferraz and Finan examine whether higher wages attract better quality politicians and improve political performance. They do this by using exogenous variation in the salaries of local legislators across Brazil's municipal governments. The analysis exploits discontinuities in wages across municipalities induced by a constitutional amendment defining caps on the salary of local legislatures according to municipal population.

Their main findings show that higher wages increases political competition and improves the quality of legislators, as measured by education, type of previous profession, and political experience in office. Ferraz and Finan write,
Our findings indicate that increases in the salary of legislators not only attract more individuals to run for political office, but also attracts more educated ones. A one standard deviation increase in wages increases political competition by 0.7 candidates per seat and the share of candidates with a high school degree by 7.4 percent. We also find that higher salaries attract more candidates from white-collar professions (i.e. more businessmen and lawyers compared to farmers and policemen). Moreover, these effects are not limited to the pool of candidates. In municipalities that offer higher salaries, politicians have higher reelection rates, particularly those that are more educated. Thus, legislative bodies that pay higher wages have more educated and experienced legislators.
This is the political version of Henry Ford's $5 a day deal.

In addition to this positive selection, they find that wages also affect politicians’ performance, which is consistent with a behavioral response to a higher value of holding office. Ferraz and Finan explain,
In addition to these effects on political selection, we also find that salaries affect politicians’ performance. Legislators can influence local policy-making by submitting bills (formal requests for project that are then passed into laws) and petitions (requests for targeted public works). We find that higher wages increase both the number of bills submitted by the legislators and those approved. But, our findings show mixed evidence with respect to public goods provision. While higher salaries increase the number of health clinics and schools, and improve school infrastructure, we find no effects on households’ access to water and sanitation.
It should be noted that while these effects on legislative performance are consistent with a political agency model where changes in the value of holding office affect political behaviour, there are problems with being able to separate this agency effect from a positive selection effect. Ferraz and Finan do however provide suggestive evidence that the increase in legislative productivity is not entirely driven by the positive selection of politicians. Their results do, in fact, suggest that legislators do put more effect into policy-making due to an increase in the future value of holding office.

In addition the Ferraz and Finan findings suggest that increases in wages are likely to make incumbent politicians more accountable because it makes the value of holding office in the future higher. Politicians respond by increasing their legislative effort in order to boost their chances of re-election.

So politicians respond to incentives just like everybody else. Who would have guessed?

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