Are Bureaucrats Really Paid Like Bureaucrats?∗

Traditionally, bureaucrats are viewed as a stereotypical example of employees with flat pay schedules and low-powered incentive schemes. This paper challenges this view by providing evidence that wages of a particular group of senior bureaucrats city managers are tightly connected to their performance. In particular, salaries of city managers are strongly linked to city growth. Additional tests indicate that these results reflect reward for performance, rather than rent extraction, as exogenous shocks to city growth do not affect city managers’ wage. This evidence demonstrates that at least for some bureaucrats there is a strong association between performance and compensation. Competition among local governments is likely to be the main force that sustains highpowered incentives for city managers.