Patronage and Favoritism in Formula-Based Transfer Allocations1
Gerrit J. Gonschorek · 2023
Chapter 5 analyzes whether nondiscretionary formula-based transfers are an effective measure against patronage ( Chapter 3 ) and favoritism ( Chapter 4 ) in Indonesia’s public fund allocations. Formula-based transfers that tie the allocation of public funds to local development indicators are often seen as one effective measure to reduce special-interest politics, although the limited empirical evidence on formula-based transfers suggests the opposite. However, the few existing empirical studies on this issue evaluate formula-based transfers without comparing them to a more discretionary counterfactual scheme, such as a non-formula-based institutional transfer design. We thus do not know how biased the allocations would be without a formula-based transfer allocations. Indonesia’s institutional public grant design provides a unique opportunity to compare these two transfer designs within the same country for the first time. The analysis allows to investigate special interests in public fund allocations holding the political system, the observation period, and the government officials involved constant, while varying the institutional transfer design. Using a fixed-effect model on an unbalanced panel dataset of 428 Indonesian districts from 2004 to 2017, the results show that non-formula-based specific allocation grants are systematically biased toward Indonesia’s National Budget Commission members’ home districts. The home districts of the same set of Budget Commission members do not, in contrast, receive significantly higher per capita transfers under the formula-based transfer design. These results illustrate that – in contrast to its more discretionary alternative – a formula-based institutional public grant design can effectively limit public fund manipulations by government officials.