Read the working paper
INSEAD Working Paper 2015/80/EPS
We use exogenous changes in the size of local municipalities in Denmark to estimate the effect of political power on the income of politicians and their family members. We exploit two dimensions of political power: heterogeneity in politicians’ roles within a given district, and exogenous increases in political power as proxied by population and budget size. Our difference-in-differences results indicate that an increase in political power has: 1) an economically small but statistically significant effect on the income of re-elected politicians; 2) an economically larger effect on income of influential politicians such as coalition party leaders and mayors; and 3) an economically large effect on politicians’ offspring. We estimate a positive and significant elasticity of income to political power, which spans from 3 percent for re-elected candidates to 14 percent for mayors. To control for differential changes in electoral competition, we instrument the likelihood of re-election with average party votes in other municipalities and in national elections. We conclude that, even in a low-corruption environment, there is an economically relevant return to political power— beyond the return to office holding—which mostly benefits influential politicians and their offspring.