Are Politicians Really Paid Like Bureaucrats?

In this paper, we examine the empirical determinants of politicians’ pay. Contrary to widespread assumptions, we document substantial variation in the wages of politicians, both across states and over time. Using data for the US during 1950-90, we provide what we believe to be the first empirical analysis of gubernatorial pay. We find that gubernatorial wages respond to changes in state income per capita and taxes, even after controlling for state and time fixed effects. The economic effects seem large: governors receive a 4.5 percent increase in pay for each ten percent increase in income per capita in their states and a 1 percent pay cut for each ten percent increase in per capita tax payments. We then test "payfor-performance" versus "rent-extraction" models of pay determination. The evidence suggests that the income elasticity is driven by rentextraction considerations, while the tax elasticity is governed by a (primitive) pay-for-performance model. Lastly, we document several patterns that suggest that "democracy" plays a role in shaping gubernatorial pay.