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Corruption in Indonesia

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  • J. Vernon Henderson
  • Ari Kuncoro

Abstract

Bribes by firms in Indonesia arise principally from regulations --licenses and levies --imposed by local government officials. Regulations generate direct revenues (fees) plus indirect revenues in the form of bribes. The expected value of the latter is capitalized into lower salaries needed by localities to compensate public officials. Localities in Indonesia are hampered by insufficient revenues from formal tax and transfer sources to pay competitive salaries plus fund demanded' levels of public services, because local tax rates are capped by the center and inter-governmental transfers are limited. Thus the direct and indirect revenues from local regulations are critical to local finances. The paper models and estimates the key aspects of corruption -- the relationship between bribes, time spent with local officials, and different forms of regulation. It models how inter-jurisdictional competition for firms limits the extent of local regulation and how greater sources of tax or inter-governmental revenues reduce the need for regulation and corruption. The paper estimates a large reduction in regulation in better funded localities. The findings are directly relevant to Indonesia where corruption is high and the country is in the throes of major decentralization and local democratization efforts.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10674.

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Date of creation: Aug 2004
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Handle: RePEc:nbr:nberwo:10674

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References

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  7. Svensson, Jakob, 2000. "Who must pay bribes and how much? Evidence from a cross-section of firms," Policy Research Working Paper Series 2486, The World Bank.
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  16. World Bank, 2003. "Combating Corruption in Indonesia : Enhancing Accountability for Development," World Bank Other Operational Studies 14652, The World Bank.
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Citations

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Cited by:
  1. Hendriks, Jean & Lockwood, Ben, 2005. "Decentralization and Electoral Accountability : Incentives, Separation, and Voter Welfare," The Warwick Economics Research Paper Series (TWERPS) 729, University of Warwick, Department of Economics.
  2. Adam, Antonis & Delis, Manthos D & Kammas, Pantelis, 2012. "Fiscal decentralization and public sector efficiency: Evidence from OECD countries," MPRA Paper 36889, University Library of Munich, Germany.
  3. Finan, Frederico & Ferraz, Claudio, 2005. "Reelection Incentives and Political Corruption: Evidence from Brazilian Audit Reports," 2005 Annual meeting, July 24-27, Providence, RI, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) 19544, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  4. Ferraz, Claudio & Finan, Frederico S., 2007. "Electoral Accountability and Corruption in Local Governments: Evidence from Audit Reports," IZA Discussion Papers 2843, Institute for the Study of Labor (IZA).
  5. Kunal Sen & Liesbet Steer, 2005. "Survey of recent developments," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 41(3), pages 279-304.
  6. Lockwood, Ben, 2005. "Fiscal Decentralization: A Political Economy Perspective," The Warwick Economics Research Paper Series (TWERPS) 721, University of Warwick, Department of Economics.
  7. Pranab Bardhan & Dilip Mookherjee, 2005. "Decentralization, Corruption and Government Accountability: An Overview," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series, Boston University - Department of Economics dp-152, Boston University - Department of Economics.
  8. Julien Hanoteau & Virginie Vial, 2014. "Institutions, corruption and entrepreneurship: Indonesian evidences," EcoMod2014 6689, EcoMod.
  9. Ari Perdana & Deni Friawan, 2007. "Economic Crisis, Institutional Changes and the Effectiveness of Government : the Case of Indonesia," Governance Working Papers 21905, East Asian Bureau of Economic Research.
  10. Kenny, Charles, 2006. "Measuring and reducing the impact of corruption in infrastructure," Policy Research Working Paper Series 4099, The World Bank.

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