Outside Income and Moral Hazard: The Elusive Quest for Good Politicians

In most modern democracies elected officials can work in the private sector while appointed in parliament. We show that when the political and market sectors are not mutually exclusive, a trade-off arises between the quality of elected officials and the effort they exert in political life. If high-ability citizens can keep earning money outside of parliament, they will be more likely to run for election; for the same reason, they will also be more likely to shirk once elected. These predictions are confronted with a unique dataset about members of the Italian Parliament from 1996 to 2006. Empirical evidence shows that bad but dedicated politicians come along with good but not fully committed politicians. There is in fact a nonnegligible fraction of citizens with remarkably high pre-election incomes who are appointed in parliament. These citizens are those who gain relatively more from being elected in terms of outside income. Conversely, they show higher absenteeism rates in parliament votes.