Why High-level Executives Earn Less in the Government Than in the Private Sector

Though governmental officials often have far greater responsibilities and make far more consequential decisions than do CEOs of private firms, government officials often earn far less. We offer explanations for the differences, considering Nash bargaining with the head of a governmental agency or with the CEO of a private firm. In the benchmark case, with a governmental agency providing consumer surplus in addition to profits, a governmental official earns more than a private CEO. But if for a governmental agency one official sets price and a different official negotiates pay, then under some conditions the head of a governmental agency will be paid less than the head of a for-profit firm. And in the plausible case where a governmental agency produces a non-excludable public good, and the agency is financed by a distortionary tax, then even if the consumer surplus generated at the governmental agency is greater than the profits of a for-profit firm, the head of the governmental agency may be paid less. We also show that a governmental official who is paid less than a private CEO faces lower-powered incentives.