Efficient Contracting or Rent Extraction: Evidence from City Manager Cash Benefits in California

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Abstract

I study implications of city managers' cash benefits in the state of California from 2011 to 2017. Cash benefits include lump sum one-time payments, car allowances, meeting stipends, longevity pay, incentive pay and bonuses. Using a municipality fixed-effects model, I find consistent evidence that city manager cash benefits are negatively associated with corruption convictions, which is in line with the efficient contracting argument. This result remains robust using an alternative proxy of cash benefits, in a change model analysis, and a Heckman two-stage model. I also find evidence that a strong council is negatively associated with CAO corruptions. Cross-sectional analyses further suggest that the negative relation is stronger when the CAO has higher ability, the CAO has a longer tenure, and the city has a higher sales tax rate. Finally, I document that city manager cash benefits are positively associated with performance and retention rate. My study provides unique evidence on the consequences of public officials’ cash benefits in the public sector.

Author

• yuan ji, The University of Texas at Arlington