Corruption in Indonesia

J. Vernon Henderson, Ari Kuncoro

NBER Working Paper No. 10674
Issued in August 2004
NBER Program(s):   PE

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.

download in pdf format
   (374 K)

email paper

A non-technical summary of this paper is available in the January 2005 NBER digest.  You can sign up to receive the NBER Digest by email.

This paper is available as PDF (374 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w10674

Users who downloaded this paper also downloaded these:
Henderson and Kuncoro w12110 "Sick of Local Government Corruption? Vote Islamic"
Shleifer and Vishny w4372 Corruption
Olken w11753 Monitoring Corruption: Evidence from a Field Experiment in Indonesia
Henderson, Kuncoro, and Turner w4178 Industrial Development in Cities
Olken and Pande w17398 Corruption in Developing Countries
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us