The effect of regional income inequality and social diversity on the provision of local public goods in Indonesia

Purpose - The purpose of this paper is to quantify the effects of regional income disparity and social diversity on local public goods delivery in Indonesia. Design/methodology/approach - Using Indonesian provincial data over the period 2001–2014 and by way of System GMM, this paper circumvents endogeneity and persistence of key variables over time which may bias the estimated impact of the critical variables. Findings - The result provides no significant evidence on the influence of regional income inequality on the provision of local public goods. The result reveals that ethnic diversity is associated with the more extensive provision of local public goods. A large difference in preferences toward public goods provision in a fragmented society such as Indonesia forces the local government to deliver a greater mixed of public goods to accommodate various preferences for public goods and ensure that each group has equal access to public goods. Political fragmentation within an ethnically heterogeneous society also encourages local politicians to provide a larger provision of public goods to form an inter-ethnic coalition to gain local political access. Practical implications - The significant effect of ethnic diversity on public goods provision implies a set of policy recommendation for Indonesian Government in order to maintain peace within the country. The central government should establish a clear-cut standard of local public goods provision for local governments to ensure that that anyone has equal access to public goods regardless of ethnicity. This will mitigate the possibility of ethnic conflict in an ethnically plural society. Originality/value - This paper extends its analysis using both fractionalization and polarization indexes to measure the social diversity in Indonesia to obtain a comprehensive knowledge regarding the influence of ethnic diversity on the public good provision. This paper proposes a set of policy recommendation for Indonesian Government to manage the effect of social diversity on the provision of local public goods. To the author’s knowledge, this has never been done before for Indonesia. Peer review - The peer review history for this article is available at:https://publons.com/publon/10.1108/IJSE-12-2018-0661