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Fiscal competitions among Indonesian municipalities: a spatial econometric analysis

Abstract

The theory of the yardstick competition argues that the voters may compare their administration performance with their jurisdiction neighbors. This paper analyzes the presence of yardstick competition shapes in municipal finances. The competition mechanism prevails the effects of the neighbor’s tax setting, allocation preference, public service provision, and awarded competitive grants to a local government decision. I show these effects by examining the Indonesian municipality’s data from 2000 to 2014 by a spatial economics approach. Later, I test the consistency of the effects of the yardstick competition to the voting results. However, it appears that the neighborhood performance does not have significant impact to the voter gauge.

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Notes

  1. 1.

    Boarnet and Glazer (2002) and Akai and Suhara (2013) introduced the variation of neighbor relationship matrix in the wider terms.

  2. 2.

    I follow Allers’ (2012) framework on defining welfare. The voters only have information on received services and paid taxes, and information about these variables in neighbors also accessible. Alternatively, welfare also can define as contribution to citizen income, for instance, pension benefit, tax compensation, and employment benefit (Fiva and Rattsø 2006).

  3. 3.

    The data from Indonesia Dataset for Policy and Economic Research (INDO-DAPOER), The World Bank, also included in the data set.

  4. 4.

    The analysis covers all sub-provincial governments in Indonesia, which include municipals (Kabupaten) and cities (Kota). City of Jakarta not included, since the inclusion creates a strong outlier effect.

  5. 5.

    PAD is an abbreviation of Pendapatan Asli Daerah.

  6. 6.

    Definition of capital and routine spending are from Republic of Indonesia Government Regulation No 21 Year 2004.

  7. 7.

    The paper follows Martinez-Vazquez et al. (2008) who employ a dummy variable for regional clusters where are categorized into Sumatra, Jawa, Kalimantan, Sulawesi, Bali and Nusa Tenggara, Maluku, and Papua group.

  8. 8.

    See Anselin and Bera (1998) and Anselin et al. (2006) on methodology on creating spatial contiguity matrix.

  9. 9.

    They are two kinds of weighting matrices using sharing border concept; rook contiguity matrix and queen contiguity matrix. Both produce similar weighting matrix if the shape of observation is irregular (Anselin et al. 2006).

  10. 10.

    DAU is an abbreviation Dana Alokasi Umum and DAK is an abbreviation of Dana Alokasi Khusus.

  11. 11.

    Before the stipulation of Law No. 32 year 2004 on Local Government, the appointment of local government leader is carried out by indirect election. Erb and Sulistiyanto (2009) noted that until 2008, only 440 municipals/cities have conducted direct election.

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Acknowledgements

The author would like to thank Nobuo Akai and Tetsuya Matsubayashi (Osaka University) for their kind input, comments, and supervision on this research. I would also like to thank three anonymous reviewers for their constructive comments and suggestions to improve this paper. Any errors in this paper are subjected to the author.

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Correspondence to Tengku Munawar Chalil.

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Chalil, T.M. Fiscal competitions among Indonesian municipalities: a spatial econometric analysis. Asia-Pac J Reg Sci 4, 241–260 (2020). https://doi.org/10.1007/s41685-019-00138-3

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Keywords

  • Yardstick competition
  • Public spending
  • Spatial interaction
  • Indonesian municipalities

JEL Classification

  • D72
  • H72