Corruption in Indonesia

38 Pages Posted: 2 Sep 2004  

J. Vernon Henderson

London School of Economics & Political Science (LSE); National Bureau of Economic Research (NBER)

Ari Kuncoro

University of Indonesia

Date Written: August 2004

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.

Suggested Citation

Henderson, J. Vernon and Kuncoro, Ari, Corruption in Indonesia (August 2004). NBER Working Paper No. w10674. Available at SSRN: https://ssrn.com/abstract=579817

J. Vernon Henderson (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ari Kuncoro

University of Indonesia ( email )

Jl. Prof. Sumitro Djojohadikusumo
Depok, DKI 16424
Indonesia

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