*Higher Pay, Worse Outcomes? The Impact of Mayoral Wages on Local Government Quality in Peru*

That is the title of an article by Ricardo Pique (Ryerson University) in the Journal of Public Economics. Does raising salary for mayors result in better mayoral performance, or gentrify the pool of candidates in some way? Here is Pique on the evidence from Peru:

In this paper, I study how wages earned by local politicians affect local government quality. To identify the effects, I use caps imposed by the Peruvian central government on mayoral wages as an excluded instrument. The results show that mayoral wages do not improve government performance. In particular, there is a negative impact on public investment implementation and on performance goals set by the central government. Moreover, there is no evidence of a positive effect on politician selection, municipal bureaucratic capacity, and political effort. Wages do strongly affect the local political landscape, increasing political competition and reducing political support for the mayor. These changes may help explain the drop in performance as local authorities may face more political obstacles when implementing their policy agenda. Overall, the results show that higher politician wages need not improve local government quality.

To circumvent endogeneity, the instrument for actual wages paid is the maximum amount the Peruvian central government sets for mayoral wages (through a population based step function). So the identification is going to arrive from populations narrowly passing (or not) the threshold that allows them to offer higher mayoral wages.

Of course, evaluating public sector performance is an inherently difficult thing to do. There is a large cocktail of dependent variables, and they consistently show that they are negatively affected by getting the inducement into a higher wage. One of the author’s preferred outcome measures is a budget execution rate. According to Pique, Peruvian mayors are significant administrators of investment projects backed by the federal government, so he uses the share of the investment budget that was actually spent (“execution rate”). This was not very intuitive to me, so I’m just going to pull the explanation from footnote 38 on page 9:

Unlike other policy outcomes such as total revenue, investment implementation is within the mayor’s control. Local authorities are constantly pressured by both the central government and the local population to carry out their budgeted investment projects. Both national and local newspapers produce articles comparing the relative performance of local authorities in matters of public investment implementation. Failure to implement budgeted public investment projects can be particularly dangerous amid a weak institutional and political context. Ponce and McClintock (2014) show that low levels of implementation are correlated with more social protests.

Here is a sampling of some of the main results, and of course the study has many robustness checks with a particular interest on whether this gets at performance:

mayerdepvariable

So, broadly, the effect on performance is negative. The question is why, and one possibility is that it undesirably changes the selection of mayors, so a variety of mayor and candidate for mayor attributes are effected by the wage offer. This does not appear to be the case:

mayorattributes

A number of other plausible outcomes are investigated, including bureaucratic capacity, political effort, and political competition, and it seems like political competition (increased number of parties, reduction in winner’s vote share, reduction in public sector experience) is the most plausible explanation in terms of why a change occurs, though it is not terribly clear why this reduces performance rather than increasing it. Pique says the pattern is perhaps most supportive of creating a rising obstructionist party at the local level and this might be a Peru specific outcome. The negative effects on getting mayors with public sector experience shows up in a variety of ways, and I’m somewhat inclined to think of that as an important finding towards explaining what is happening. In my opinion, public service motivation is underrated by the public (albeit overrated by public administration scholars)

There is much of interest and to admire in the paper. For background reading, perhaps consider Besley and Case’s (1995) QJE paper “Does Electoral Accountability Affect Economic Policy Choices?“.

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