Wage Cuts, Social Distributional Preferences, and Political Corruption: Preliminary Results

Many countries are considering cuts to public-sector salaries as a path to fiscal consolidation. Yet, can lowering politicians' pay incentivize corruption? This paper examines how wage reductions affect political corruption and how these effects vary with public administrators' social distributional preferences. We conduct a laboratory experiment in a developing country, simulating a public administration setting in which administrators allocate public funds. After an initial round under stable compensation, a 60% wage cut is introduced for a randomly assigned subset of participants. Holding selection constant, we find that wage cuts significantly increase rent extraction: treated administrators extract, on average, 9% more. Importantly, social distributional preferences strongly predict both baseline corruption and responsiveness to wage cuts. Administrators classified as altruistic extract less than those classified as selfish, yet both groups increase corruption following the wage cut. Beliefs about others' behavior also deteriorate, with the expected extraction by peers rising by 10%, indicating a breakdown in normative expectations. These findings suggest that austerity measures can erode ethical behavior even among intrinsically motivated officials, underscoring the need to align fiscal reforms with incentive structures and anti-corruption strategies to preserve integrity in public governance.