Focus on Research

June 1, 2012 12:03 pm

Something for the weekend

The amount of money a politician is paid is a subject that is guaranteed to provoke furious debate. Are they already paid too much, or would higher compensation equate with higher calibre? Now Italian academics have put this question to the test to see whether increasing remuneration does in fact attract better performing politicians.

Tommaso Nannicini, an assistant professor of economics at Bocconi University and Stefano Gagliarducci from the Università di Roma Tor Vergata focused on two areas. Firstly would increasing remuneration for politicians attract more skilled individuals, people who might otherwise have been drawn to the private sector and its correspondingly higher salaries? Or would higher salaries encourage incumbent politicians to perform better because re-election would depend on how well they fared while in office?

Using data from Italian municipal governments from 1993 -2001 the researchers compared the mayors of towns with a population hovering around the 5,000 threshold.

They found that a 33 per cent increase in wages for the mayors attracted candidates with 6.4 per cent more years of education.

They also discovered that an increase in wages drew in greater numbers of mayoral candidates with white collar occupations such as lawyers and managers. Higher salaries conclude the academics, “Draw more able and better educated candidates into politics and even the incumbent politicians perform better”.

Their paper, Do better paid politicians perform better? Disentangling incentives from selection, will be published in the forthcoming Journal of the European Economic Association.

The cliched view of the entrepreneur is someone who is willing to gamble it all, to risk everything for the chance of enormous gains. But two academics with an interest in entrepreneurship have decided to take a closer look at fledgling businesspeople to see if this assumption really is the case.

Hongwei Xu, an assistant professor of entrepreneurship at Insead and Martin Ruef, professor and director of graduate studies in sociology at Princeton University studied more than 60,000 people at Stanford University and divided them into two groups of people: those who had recently started their own businesses and those who had not, ie the general population.

Both groups were then asked to select one option out of a possible three for a venture investment: a $5m profit with a 20 per cent chance of success; a $2m profit with a 50 per cent chance of success and a $1.25m profit with an 80 per cent chance of success.

The academics discovered that the majority of fledgling entrepreneurs would be far more inclined to accept the smallest amount of profit along with the greatest chance of success. Whereas the general population was far more likely to opt for the riskiest option which brought with it the greatest rewards.

Prof Xu says that the motivation for entrepreneurs is different to that of the general population.

“Non-pecuniary motivations are more important than monetary motivations for people to start a new business,” he says.

“One is autonomy: people want to be their own boss. The other is identity fulfilment which is more about people having a vision about a product or a service. But their employers do not give them the freedom to develop within the company structure. That is a key driver.”

Prof Xu advises individuals who are motivated by the thought of earning a lot of money not to create a venture. Becoming an entrepreneur is a risky business he counsels and only works if passion is involved. Before an entrepreneur receives any financial rewards he points out, there will be considerable hardship and those wishing just to make money are more likely to give up at that point. An entrepreneur – someone who has a passion for the venture – will be more prepared to ride this emotional roller coaster he adds, because he or she is not creating the venture purely for financial gain.

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