Paying Politicians: Theory and Evidence

This paper looks at the theory behind the idea that paying politicians better will improve their performance. The paper lays out a political agency model with adverse selection and moral hazard where politicians are subject to two-period term limits. This model provides a number of predictions about how the pay of politicians affects agency problems. We also consider what happens when the pool of politicians is endogenous. The main ideas in the model are confronted with data on U.S. Governors. ∗This paper was first given as the Joseph Schumpeter Lecture at the 18th Congress of the European Economics Association in Stockholm. I am grateful to Robin Burgess, Rohini Pande, Ray Fisman, Sanjay Jain, Rocco Macchiavello, Torsten Persson, Michael Smart, and Daniel Sturm for useful discussion and comments on a earlier draft. Daniel Sturm and Ray Fisman were also kind in offering me access to their