Decentralization in Indonesia and Local Outcomes

We analyze Indonesia’s big-bang decentralization, which in the early 2000s translated into massive transfers of resources to local districts. Using the non-linearity of the allocation rule to circumvent the potential endogeneity that arises when regressing local outcomes on district revenues, we answer two questions. First, how does the level and composition of local government spending respond to additional revenues? Second, given this spending response, what is the impact on development outcomes of households and firms? We use these results to perform structural estimates of the efficiency of spending across three categories of outcomes, namely infrastructure, health, and education, and evaluate its district-level determinants.