Ethnic Diversity, Social Norms and Elite Capture: Theory and Evidence from Indonesia

Elite capture is a natural concern regarding decentralization. We highlight the effects of ethnic diversity and social norms on the extent of such capture. Ethnic diversity, through differences in the preference for public goods, facilitates capture. However, this may be counteracted by social norms that promote cooperative behaviour within communities. We test these theoretical predictions using community‐level data from the 1997 and 2007 Indonesian Family Life Survey rounds, with fiscal decentralization being implemented in between. We exploit a particular institutional feature of Indonesian communities—namely, the observance of traditional ‘Adat’ laws to proxy coordination across ethnic groups. Overall, we find that ethnic diversity depresses community‐level development spending after decentralization, particularly where Adat laws (which promote an ethic of mutual cooperation) are not followed. The opposite is observed for spending on non‐developmental items.