Faculty and Research

© Journal of Law and Economics, October 2004
Volume: 47 | Issue: 2 | Pages: 477-514

Publication type: Journal article

Research Archive Topic: Business Economics and Public Policy, Capital Markets and Investments, Corporate Finance

Abstract

We provide the first empirical analysis of gubernatorial pay. Using US data for 1950-90 we documentsubstantial variation in the wages of politicians, both across states and over time. Gubernatorial wages respond to changes in state income per capita and taxes, after controlling for state and time fixed effects. Our estimates suggest that governors receive a 1 percent pay cut for each ten percent increase in per capita tax payments and a 4.5 percent increase in pay for each ten percent increase in income per capita in their states. There is evidence that the tax elasticity reflects a form of "reward-for-performance". The evidence on the income elasticity of pay is less conclusive, but is suggestive of "rent extraction" motives. Lastly, we find that democratic institutions seem to play an important role in shaping pay. For example, voter-initiatives and the presence of significant political opposition lead to large reductions in the income elasticity of pay, and to large increases in the tax elasticities of pay.

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