Working Paper: NBER ID: w18976
Authors: Edward L. Glaeser; Giacomo A. M. Ponzetto
Abstract: Why are public-sector workers so heavily compensated with pensions and other non-pecuniary benefits? In this paper, we present a political economy model of shrouded compensation in which politicians compete for taxpayers' and public employees' votes by promising compensation packages, but some voters cannot evaluate every aspect of compensation. If pension packages are "shrouded," meaning that public-sector workers better understand their value than ordinary taxpayers, then compensation will be inefficiently back-loaded. In equilibrium, the welfare of public-sector workers could be improved, holding total public sector costs constant, if they received higher wages and lower pensions. Central control over dispersed municipal pensions has two offsetting effects on pension generosity: more state-level media attention helps taxpayers better understand pension costs, which reduces pension generosity; but a larger share of public sector workers will live within the jurisdiction, which increases pension generosity. We discuss pension arrangements in two decentralized states (California and Pennsylvania) and two centralized states (Massachusetts and Ohio) and find that in these cases, centralization appears to have modestly reduced pension arrangements; but, as the model suggests, this finding is unlikely to be universal.
Keywords: Public Pensions; Political Economy; Information Asymmetry
JEL Codes: H55; H75
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| difficulty in evaluating pension costs (J32) | inefficiencies in public-sector compensation (J45) |
| shrouded pension packages (H55) | preference for higher pensions over immediate wages (J32) |
| preference for higher pensions over immediate wages (J32) | suboptimal age-earnings profile (J26) |
| shrouded pension packages (H55) | overcompensation through pensions at the expense of current wages (J32) |
| centralized control over pensions (H55) | enhanced taxpayer awareness of pension costs (H55) |
| enhanced taxpayer awareness of pension costs (H55) | reduced generosity of pensions (H55) |
| centralized control over pensions (H55) | increase in the number of public-sector workers (J45) |
| increase in the number of public-sector workers (J45) | higher pensions (H55) |
| public-sector workers' informational advantage (J45) | distortion in compensation structure (M52) |
| increased awareness among taxpayers (H26) | lower pension generosity (H55) |
| higher public-sector worker awareness (J45) | increased pension benefits (H55) |