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How Much Is Your Vote? Opportunistic Business Cycles of Grant Expenditures

in Indonesia’S Local Election

Article  in  SSRN Electronic Journal · January 2018

DOI: 10.2139/ssrn.3303074

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 How much is your vote?
Opportunistic business cycles of grant expenditures
in Indonesia’s local election

Tengku Munawar Chalil1

Abstract
The opportunistic political cycles theories argued that the incumbent raises the visible expenses in the
election time. The paper presents an alternative case that the public planning cycles do not allow the
incumbent to hike these expenditures. As a short-cut, the incumbents prefer to increase the grant
expenditures to the voters than subsidies, such as grants to interest groups or the strategic influencers
at the election year. The paper tests the argument by using the case of Indonesia local election and
spending data. The results suggest that when the incumbents are participating in the election, the
increase of these expenses are observed. However, the impacts are mediated if the incumbents are in a
secure position where the rooted political party has majored the vote share. If the incumbents are not
secured, these type of spending exhibits a much substantial effect.
JEL: I31, H72, D72, D78
Keywords: election, political cycles, government expenditures

1. Introduction
The vast literature of opportunistic business cycles prompted us about the incumbent easily deceives the myopic and
irrational voters via manipulating the office budget, mainly when the election takes place. The budget towards projects
with immediate visibility exhibits increases as a signal from an incumbent who wishes to maximize their probability of
reelection (Rosenberg, 1992; Rogoff, 1990; Baleiras, 1997). A large volume of empirical papers on opportunistic cycles
accepts that the electoral event and incumbent behavior is distorting the visible expenditures (Drazen and Eslava, 2005;
Baleiras and Costa, 2004; Rosenberg, 1992; Veiga and Veiga, 2007).
This article seizes the different points of view on testing the traditional political business cycles theory. The
argumentation is the visible capital investment is not an ace for an incumbent for gaining votes, but the transfer to the
voters is. It is prevalent in the developing world that the incumbent may use the discretionary power to increase the
expenditure that has benefit for their campaign. Instead of accomplishing physical project with many risks of failure, it is
effortlessly by buying the votes directly, i.e., giving targeting the spending to interest groups in the community, persuade
the strategic vote’s influencers through political money, and strengthen the campaigning team through administration aids.
The strategy seems to be a boomerang if the voters are rational and non-myopic but effective if they are not.2 This
situation is ubiquitous in the developing country where the mean income distribution skew on low to middle income, where
the swing voters located. The policy for allocating transfers to these voters would be the finest where they experience the

1 Doctoral Student at Department of Comparative Public Policy, Osaka School of International Public Policy (OSIPP), Osaka University; 1-31
Machikaneyama, Toyonaka, Osaka, Japan. e-mail: c-tengku@osipp.osaka-u.ac.jp.
2 Drazen and Eslava (2004) suggested that the non-myopic and rational voters would punish the incumbent that manipulate the public budget during election

i.e. increasing deficits.

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benefit from the government. The voters do not have a high expectation to a future government since the corruption has
rooted in administration and so replacing the incumbent would not make significant changes. 3 Simultaneously, the
incumbent would be busy at campaigning than executing a capital investment in an election year. The incompetent civil
servants are dominating on an administration, which is riskier to incumbent hold an investment project that caught the
public eye. The incumbent opponent would suspect this project then investigate any corruption and any misuse by the
incompetent administration for their campaign weapon (Pierskalla and Sacks, 2018). Therefore, the incumbents are
unwilling to take the investment project at election year and pick direct transfer since the law permits it and any budget
abuse would be difficult to investigate.
The article tests the argumentation in context of Indonesia local election. The reasons are; first, the performance of
the incumbent greatly influences the electoral outcome. The voters positively responded to subsidy and welfare grants
policies than the economic result during incumbent on the office (Mujani and Liddle, 2010)4. Therefore, the Indonesian
voting environment would be ideal for conducting a natural experiment to test the hypothesis. Second, the timing of the
election and incumbent decision to go for reelection are exogenous from the government expenditure. Further, the direct
voting mechanism allows us to identify the causal relationship of opportunistic business cycles with grant expenditures.
Third, Indonesia decentralization policy offers more discretionary power to local governments on managing their
expenditures. Therefore, any spending decision is attributable to local government leaders, which suggest that the pattern
of expenditures reveal their interest.5
The results find that there is little evidence of shifts on grant expenditures during election years; however, it becomes
significant for the incumbent who participates in the election. The incumbent increases the spending for direct grants at
election years ten-percent greater than the absent incumbent. A similar result also found for the expenditure for non-capital
spending and spending inefficiency. Using the party concentration, the paper further expands the impact of reelection to
the direct transfer by categorizing the incumbent that is exalted by dominant (or coalition) of parties and those who do not.
The paper shows there are a negative slope of electoral cycle effects to grant expenses by the parallel increase of political
parties’ dominancy. It is plausible since the minor backed incumbent shall spend extra campaigning effort to increase their
probability for reelection. Comparable tests using non-capital spending and spending efficiency also support the hypothesis
that the minor supported incumbent is in the front line on raising the direct transfer expenditure. In another hand, the basic
scenario where the administration does not go for reelection, it appears that the direct transfer does not exhibit any
significant change adjacent to the election time.
Even though the paper is straightforward using the Indonesian context, but the findings may extend to developing
economic practice by three condition contexts. First, the environment of voters and bureaucrats motives is different from
developed countries.6 The fat portion of low educated people and rising of inequality speak the condition of promising
future is unnecessary than the short-term benefit, e.g., direct transfers. Second, Indonesia local democracy adopts the direct

3 Hill (2002) argued that corruption, clientelism and patronage are deeply embedded on bureaucracy at South East Asia. He also noticed that a tiny bureaucratic-
political elite controlled the macroeconomic policy in Thailand and Indonesia before Asian financial crisis.
4 Their paper also explained that the success of Soesilo Bambang Yudhoyono reelection (incumbent in 2009 presidential election) is the drop of the fuel price

is appreciated by public, which was largely subsidized by National Budget.

5 Pranab and Mookherje (2006) mentioned few developing countries that grant high discretionary powers to local government for local provision; Indonesia,

Bolivia, and Brazil. The dissatisfaction to central government performance triggers a huge force from local representative to a sudden decentralization policy,
which lead to authority transfer with less intervention from the central.
6 Ansolabehere et al (2003) describe that the half of party money in the US election powered from private and voter’s contribution. It appears that the voters

are willingly to pursue of their trusted candidate for election. However, contrast to Indonesia local election, the candidates sacrifice their saving for financing
campaign, barnstorm the swing voters and persuade a political party as his ride for election.
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election system, which allows the voters pick the candidate that adequate to their preference. Third, the decentralization
system allows the local governments to possess more discretionary power in determining local expenditure, which
demonstrates the incumbent’ advantages for disrupting public expenses.
This study underlines at least two significant contributions. First, it grants us distinct understandings of the
environment of developing democracy. The incumbent’ advantages create an unbalance competition on election by raising
spending that is valuable to myopic voters. The paper may give hints about the unhealthy democracy where the money
politics is accustomed. Therefore, the task of identifying the source of money politics is important. This study points that
the grant expenditures are vulnerable abused as political money. These expenses escalate in the election year, especially
where the incumbent participates. Second, the paper proposes a different argumentation of traditional PBC literature. While
PBC literature put foundation on the impact of visible investment to attract the rational and non-myopic voters, the article
emphasizes on grant transfers are more appeal to the myopic voters. Further, the party support also takes to account as the
mediation of opportunistic business cycle to expenditure, which is applicable for developing democracy setting.
This study is organized as follows. The next section builds the theoretical foundation and hypothesis statement.
Section 3 explains the empirical strategy. Section 5 reports the results and discussion. Finally, the last section withdraws
several conclusions and policy recommendations.

2. Hypothesis Statement and Theoretical Background

Study of opportunistic business cycle initially proposed by Rogoff (1990)’ seminal work where the incumbents alter
the expenditure as a competence signal to the voters.7 The voters judge the incumbent capacity by the economic indicators
e.g., inflation, unemployment, tax rate, and budget balance. The anticipate incumbent would ameliorate the indicators on
the period of election. Baleiras (1997) showed that the incumbent increase the spending that is visible to the voters prior to
the election. He explained that the incumbent prefers to maximize his utility at election period than uncertain utility post-
election. Drazen and Eslava (2005) presented that the incumbents well aware about voters’ preferences; therefore weigh
the expenditure to the targeted voters in election cycles. He argued that political expenditure manipulation sighted at within
the budget, e.g., portion shift of targeted and non-targeted budget than the increase of total budget. Several empirical papers
have shown the alteration of public expenditure prior to the election, both in national level (Brender and Drazen, 2008;
Blais and Nadeau, 1992) and sub-national level (Geys, 2007; Sakurai and Menezes-Filho, 2008; Sjahrir et al., 2013; Veiga
and Veiga, 2007). Studies began to investigate the elaborate the impact of political cycle to expenditure – for example
reduction of capital expenditure due to fear of lawsuit (Pierskalla and Sacks, 2018), uncertainty of incumbent (Baleiras and
Costa, 2004), growth of voter targeted spending (Drazen and Eslava, 2004), influence mediation via media penetration
(Vergne, 2009), and party alignment at parliamentary (Le Maux et al, 2011).
Existing literature mainly posit on impacts of election cycles, but few discuss the incumbent behavior and their motive
for reelection. The environment on the incumbent perhaps shifts the impact of election cycles on government expenditure.
Asako et al. (2016) show that politicians with term-limit in the office increase the public budget. Vergne (2009) presents
that a competitive and highly informative economy resulted in higher total expenditures. A cohesion between the parliament
and the government should provide a good environment for an incumbent to show their attractiveness by increasing

7 Although Nordhaus (1975) are the first initiated study of political business cycles. He showed that the government altered the macroeconomic outcome to
increase popularity.
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investment expenditures (Baleiras and Costa, 2004). Therefore, our study conjectures two main questions: First, does the
incumbency would alternate the impact of election cycles to government expenditure?. Second, what kind of environment
that extends the impact of incumbency?.
The research questions have repeatedly asked on the existing literature, but our study tries to narrow the question to
address the research novelty. Whilst the previous study focus on total expenditure and/or visible investment allocation, this
article addresses the grant expenditures in which related to the incumbent’ source of funding campaign8. Mietzner (2007)
noticed that post-collapse of the authoritarian regime in Indonesia had increased the illicit fund-raising by political parties.
They forced their politicians on the administration to contribute a payback as their source of income. The mutualism
connection is also important since the incumbent need a political party as their ride for reelection. The political party would
spend the effort to convincing the voters to vote for the incumbent. In another hand, grant expenditures could target the
key organization of interest group or non-governmental organization where the strategic influencer of the swing voters
located. There are several cases that the grant expenditures are fictive expenditures. The speculation that grant expenditures
are vulnerable to abuse is growing in recent cases of Indonesia local election.9 The election cycles may distort subsidies.10
Subsidies may costly to public budget since it target a whole population. Furthermore, voters do not appreciate if increasing
subsidies will result in budget deficits. Therefore, the strategic choice of the incumbent is increasing grants for showing
their affection. Taking all together, the election cycles shall have an impact to alteration of grants expenditures and
incumbent that taking part on the election would amplify the impact, which translated into the first hypothesis:
H1. The increase of spending for grant expenditures is associated with the election years, especially where the incumbent
taking part on the election.
The following model should enhance our understanding of the mentioned hypothesis. Consider a model of two-period
expenditure that is election period and post-election period.11 Let μ as a voter’s satisfaction of government that depends
on the supply of government services and tax levy, such that:
𝜇 = 𝑉(𝑔1 ) + 𝑉(𝑔2 ) − 𝐻(𝑇) (1)
g1 and g2 are election and post-election spending respectively, T is aggregate taxes, with V'>0, V"<0 and H'>0, H"<0.
g1 and g2 shall have direct attribution to the utility of the voters at the period. The investment expenditure is not the case
since the investment expenditure would enter the utility at the next period.
Let ρ as an endogenous probability of incumbents win the election, the vNM utility for the incumbent is given by:
𝐶 = 𝑈(𝑔1 ) + 𝜌𝑈(𝑔2 ) + (1 − 𝜌)𝑊(𝑌) (2)
Where W(Y) is utility from alternative income (Y) if the incumbent loses the election. ρ consists of the base probability
of 𝜌0 , which reflects the quality of candidate based on their personal characteristic and figure, for example ,leadership
skill, charisma, and ability that is worth according to the voters. The voters also evaluate the performance of incumbent by
their record of accomplishment, that is evaluated at current performance and the expected performance if the incumbent is
reelected, 𝑓(𝜇). The second term tells us the effect of the tax rate will equate the decrease of incumbent reelection
probability. Last, the incumbent party’ (or coalition) effort on persuading the voters needs to take as account, 𝜃. The efforts

8 Silberman and Yochum (1978) gave a caveat of how important the money politics decides the election outcome.
9 Tempo, 27 November 2017, wrote a special report of an abuse of grants expenditure in Jakarta City Government. Around Rp 40,2 billion (US$ 2,5 billion)
amount of grants is fictive grants. (Koran Tempo, Monday, 27 November 2017).
10 See Vergne (2009) on positive impact of election cycles to visible current expenditure i.e. increasing wages and subsidy.

11 The model is simply derived from the established theoretical model of opportunistic business cycles. See Baleiras (1997) and Rosenberg (1992) for more
detail explanation.
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is parallel to the incumbent funding support, which come from rent extraction of a portion of grants, 𝑑𝜃 ⁄𝑑𝑔1 > 0. For
simplicity, a fixed portion of expenditure when incumbent in office (𝛼𝑔1 ) goes to incumbent campaign account. Y depend
on how good the incumbent track record, which reflected by public satisfaction μ. If the voters are badmouthing to the lose
incumbent, then his income should become low.
𝜌 = 𝜌0 + 𝑓(𝜇) + 𝜃(𝛼𝑔1 ) (3)
𝑌 = 𝑌(𝜇) (4)
If incumbent go for re-election, he prefers utilities on office than other alternative income, so that:
𝐹 = 𝑈(𝑔2 ) − 𝑊(𝑌) (5)
Maximized preference on office rather than other employment with respect to second stage expenditure is given by:

𝑑𝐹 𝑑𝜇
= 𝑈′(𝑔2 ) − 𝑊′𝑌′ ≥0 (6)
𝑑𝑔2 𝑑𝑔2

Incumbent maximizes his utility, C with constraints given in (1),(3), and (4):

𝑑𝐶 𝑑𝜇
= 𝑈 ′ (𝑔1 ) + 𝑘 =0 (7)
𝑑𝑔1 𝑑𝑔1

𝑑𝐶 𝑑𝜇
= 𝜌𝑈 ′ (𝑔2 ) + 𝑘 =0 (8)
𝑑𝑔2 𝑑𝑔2

𝑑𝜌
Where 𝑘 = [𝑈(𝑔2 ) − 𝑊(𝑌) + (1 − 𝜌)𝑊′𝑌′] > 0 . Since 𝑈(𝑋2 ) − 𝑊(𝑌) > 0, subtracting (8) to (7), deriving
𝑑𝜇

𝑑𝜇 𝑑𝜇
and from (1), it can be obtained:
𝑑𝑔1 𝑑𝑔1

𝑈 ′ (𝑔1 )−𝜌𝑈 ′ (𝑔2 )

= 𝑉 ′ (𝑔2 ) − 𝑉 ′ (𝑔1 ) (9)
𝑘

Equation (9) implies that g1>g2. Suppose that g1 ≤ g2, then transitivity implies U'(g1) ≥ U'(g2) > ρU'(g2), thus L.H.S is
strictly positive, but if g1 ≤ g2 then V'(g2)-V'(g1) ≤ 0 which contradicts L.H.S. Thus spending election stage is greater than
spending after election times. For illustration, the incumbent weight of unity under certainty on the election stage. In this
case, the certain incumbent would work as a benevolent social planner, which equate g1 and g2 as an optimal solution. 12
However, under uncertainty, the risk-averse incumbent should put g1 > g2. It also follows from the maximization of
incumbent’ reelection preference (F) and expected utility (C) that
𝑑(𝑔1 − 𝑔2 )
<0
𝑑𝜌

That is, intertemporal substitution of expenditure at both periods due to increasing the probability of re-election.
Hence the re-election probability parallel with party support (𝜃), the incumbent that is supported by supreme political party
or coalition of political parties would alter the grant expenditure less than the incumbent that is not, which leads us to the
second hypothesis:
H2. The insecure incumbents (not backed up by dominance political party) shall exhibit a stronger increase of grant
expenses.
In this scenario, the incumbent and the challenger attached to the proponent and opposition political party (or coalition

12 We can take example where g2 =1- g1

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of political parties). Both are well informed about the distribution of each party’ vote shares and the distribution of the
swing voters. A secure incumbent is certain to be reelected if the vote shares of their party/coalition dominate the share of
the opponent and the swing voters.13 Under this expectation, the incumbent does not spend much effort on the campaign
since he believes the voters are loyal to their party or coalition. The party or coalition may take higher rent after the
incumbent success secures a seat, but the payback happens after the election. In contrast, the incumbent should be insecure
if his party and coalition do not major the vote distribution. The incumbent, therefore, targets the swing voters as their
potential source of the vote. The challenger also convinces the swing voters to vote for him. However, the incumbent has
the upper hand than the challenger by giving service to targeted voters. Overall, the insecure incumbent increases the
expenditure during the election year more than the secure incumbent does.

3. Empirical Strategy
The following section is the key concern of the article, which is to test the mentioned rationale to the applied world,
which by utilizing actual information of Indonesian local governments. The description of Indonesian electoral context
appears as first subsection. Subsequently, the paper briefly explains the dataset generation and its summary. Finally,
empirical specification subsection rationalizes the tested hypotheses through the econometric framework.

3.1. Application to Indonesian Local Election

The foundation of local democracy in Indonesia has governed in the Constitution year 1945, that mentioned that the
governor, regent, and major is a head of local government which democratically elected. However, in practice during
Soeharto’s authoritarian regime (1956-1998), democracy yet far from ideal since the leader is directly appointed by the
central. Under this regime, the development massively concentrated at Java island where the central easily grasp. A rose of
development inequality then the disaster of economic crisis at 1999 triggered the chaotic civil conflict which results in the
fall of 32 years of the authoritarian power. A year after, the dawn of Indonesia’s decentralization policy began to start by
enforcement of Law 22/1999 on local autonomy. The voters are starting to participate in electing the leader, however
through the local parliamentary. Under this system, the voters only pick a political party. The political party selected the
member at the local parliament14. The share of seats at local parliament depends on the vote share of the party. Finally, the
parliament members appointed the head of the executive with a five-year term through parliament meeting. Generally, the
head of government came from majoring party or coalition of the party that dominates the seat. Erb and Sulistiyanto (2009)
underlined the failure of this democracy did not hinder the money politics practice, where the head of government executive
position falls to the candidate who has the highest bid, in terms of monetary contribution, to the local assembly members.
The second amendment of decentralization policy was the stipulation of Law 32/2004 on local governments. This law
pioneers transition to democracy where the voters directly select the head of local government by local election. The
member of the local parliament also appointed through the mechanism of direct election. Baswedan (2007) views that the
direct election mechanism is a strategy for strengthening the legitimation of Yudhoyono’s regime 15. The direct election

13 This case is possible if there are municipalities/cities that historically rooted to a certain group or political dynasty. The citizens in that area are loyal to that
group and the administration only pass the leader seat to their personal-related successor even through the stage of formal election. These kind of
municipalities/cities are quiet observed at areas where previously held indirect election on the authoritarian regime (Mietzner, 2013).
14 The party has discretionary decision to select the candidate on local parliament, depend on the seniority, contribution, and the aptitude of the candidate to

the party.
15 The sixth president of Indonesia, Soesilo Bambang Yudhoyono, won the 2009 presidential election through the tight competition. His party, the democratic

party (partai demokrat) was relatively new and did not have any historical root. Mujani and Liddle (2010) said that the majority of Indonesian voters at that time
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commenced an ideal case for a natural experiment for testing the growing theory of political economy literature – the
opportunistic business cycles to the government expenditure, for example.
There is limited literature on discussing the empirical findings of election and government expenditure relationship in
the Indonesian context. Sjahrir et al. (2013) find that political budget cycles appear for Indonesian district that conduct the
direct election. The impact significantly stronger if the incumbent take part. Pierskalla and Sacks (2018) present the drop
in capital expenditure when election takes place. They argue that local Indonesian apparatuses are afraid to take part in
capital investment at election year since it is prone to the investigation. Sjahrir et al. (2014) report that a highly concentrated
political cohesion (dominance of a political party) has a significant contribution for increasing the administrative
(unimportant) spending. Lewis (2018) shows that the directly elected officials spend the public expenses more efficiently
than the indirectly elected officials. However, none of these papers investigated the impact of opportunistic business cycles
that is the impact of incumbent on participating in the election, to the alteration of direct transfer expenditure.
Several news and reports have indicated the significant soar of direct transfer expenditures during Indonesian local
elections. The minister of Home Affairs, Government of Indonesia, remarked that some municipals increase the local grants
and social aids prior to the election.16 Ritonga (2013) reported a correlation of incumbency and social aid expenditures at
60 Indonesian districts in the 2009 fiscal year. This article goes beyond the previous findings through profound examination
of opportunistic business cycles and direct transfer expenditure by utilizing credible identification strategy to infer a causal
relationship.

3.2. Data
The detailed expenditure data of Indonesian local governments from 2008 to 2013. The information on expenditures
is available at Directorate General of Fiscal Balance, Ministry of Finance, Government of Indonesia. The information about
local government characteristic, e.g., economic, social and development indicators are obtained from the Indonesian
database for development and policy research (INDO-DAPOER), The World Bank.
The main dependent variables are the direct transfer expenditures, which consist of three types; grants, social aids,
and subsidies. The variables are in real terms expenditure (inflation adjusted), then transformed in per-capita logarithmic
form. Grant expenditures, by definition, is money/goods from a local government to other local government, company,
local community, community group or individual, which are not binding and accidentally 17. The not binding characteristics
of this expenditure are prone to abuse, which the incumbent could spend this spending as money campaign. Even though
the law stated that one of the function of this expenditure is for increasing the community awareness, but the detailed
guidance for spending it is unclear. Social aids are a direct cash transfer for the targeted community. The purpose of the
social aids should be clear otherwise it is being removed during budget consultation with the higher government. Social
aids have unbinding and accidental budget characteristics. The last, subsidies are also take form as direct transfers but have
a purpose for intervening the commodity prices. Total expenditures and local taxes revenues also take into account to check

are interested to the charisma, personal attribute and leadership of the candidate than the supporting political party.
16 Kompas.com. “Tjahjo: Jelang Pilkada, Dana Bansos Daerah Naik hingga 1000 Persen" (English translation: Tjahjo: Near to election, social aid funds increase

till 1000 percent).

https://nasional.kompas.com/read/2015/11/12/14520941/Tjahjo.Jelang.Pilkada.Dana.Bansos.Daerah.Naik.hingga.1000.Persen accessed 29 October 2018.

17 Regulation of Ministry of Home Affairs No 13 Year 2006
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 the argumentation of PBC in general. Figure 1 shows the box plots of the logged per capita direct transfers (grant
expenditures, subsidies, and social aids) in pre-election, election and post-election event. Panel A shows the box plot for
all municipal, where panel B shows the box plot for the treatment, that is the municipal which the incumbent participates
in the election. Panel A do not show any clear hint on increasing of the direct transfer expenditures at an election year.
However, vibrant pictures can be seen in panel B where grant expenditures and subsidies slightly jump at election event,
then drop significant in post-election. It seems that the election cycle is not the main explanation for increasing these
targeted expenditures, but the incumbent participation is. The next section will test this argumentation using proper
econometric techniques.

Panel A: All Election

A Grants B Subsidies C Social Aids

10
4

0
2

Social aids (log per capita)

Subsidy (log per capita)

-2

5
0

-4
-2

0
-4

-6
-6

-8

-5

pre-election election post-election pre-election election post-election

pre-election election post-election

Panel B: Election with Incumbent Participation

A Grants B Subsidies C Social Aids
10
4

0
2

Social aids (log per capita)

-2
Subsidy (log per capita)

5
0

-4
-2

0
-6
-4

-5
-6

pre-election election post-election

-8

pre-election election post-election pre-election election post-election

Figure 1. Box plots for expenditures and revenues by election event.

There are two crucial independent variables to test the first hypothesis. First term is election timing and second term
is the incumbency. The election timing is a dummy variable that take value as one if election takes place at year t, otherwise
zero. The creation of this variable is observing the election timeline at municipal/city i, where the local election timeline

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information is available at General Election Commission (Komisi Pemilihan Umum/KPU), Government of Indonesia. The
incumbency variable is also a dummy variable equal to one if the current incumbent seeks re-election at pre- and electoral
period, zero otherwise.18 The election schedule is exogenously determined since historical data shows that the event of
head government appointment under authoritarian regime is random. The transformation to direct election is only resuming
the five-year cycles. More to say about dataset, the observation years start at 2008 since almost all districts have effectively
conducted direct election19 and finish at 2013. The implementation of Law 23/2014 on local government 20 pronounces
the parallel local election, where the local election is forced to take schedule adjacent with national election. Therefore, if
a local government finish a term at 2014 or so on, the election will be postponed at the first wave of parallel election.
Higher government officials replace the leader position during a vacuum of power, which is caused, postponed election
schedule.
The exogeneity of incumbency variable is debatable. The argument of unfinished business at office may become a
motivation for an incumbent running for reelection, which support the endogeneity of incumbency. However, our interested
variable is direct transfers, which are decided accidentally. Therefore, a non-causal effect of the alteration of direct transfers
on incumbency decision should be rest-assured. The capital expenditure may have endogeneity to incumbency decision
since it covers a multi-period investment projects. Furthermore, the incumbent motivations to run or quit the re-election
are various. Health issues, seeking for higher position or income, and other personal reasons might serve as motivations
for incumbent for quit the reelection. We can treat the mentioned reasons as arbitrary to the incumbency.
The political cohesion also the important variable for testing the second hypothesis. In our perspective, using
Herfindahl-Hirschman Index (HHI) as a proxy of political concentration is a first best choice than using the vote share of
a dominant political. HHI can capture the both party’s concentration and party’s coalition. A high value of HHI presents
the dominance of a political party or a coalition (Le Maux et al., 2011). Borge et al. (2008) utilize the HHI to capture the
political strength in a district. The following formula generates the HHI:
𝑛
2
HHI𝑖 = ∑ 𝑃𝑖𝑘
𝑘=1

Pik is proportion of votes of the ith party at district k. The election system in Indonesia is unique since the schedule of
parliamentary election is not parallel with the regent/major election. The parliamentary election is adjacent with the national
election. National election conducts multiple-tiers election in same time; which are presidential election, national house of
representative (Dewan Perwakilan Rakyat/DPR), regional representative council (Dewan Perwakilan Daerah/DPD), and
local parliamentary in provincial and municipal/city level (Dewan Perwakilan Rakyat Daerah/DPRD). In level of districts,
each candidate attached to one party. This article extracts the amount of vote for a number of candidate in one political as
Pik. The regent/major candidates shall obtain the information of number of vote for a party as party share distribution. If the
voters align to their political party, then the distribution of political party should refer to distribution of voter’s preferences.
A local election should be not competitive if a political party or coalition of political party dominates the others. In this
condition, the incumbent should be rest assure to their victory. 21 Our dataset covers the HHI data at 2004 and 2009

18 The incumbents anticipate the upcoming election, therefore the event before the election should be taken to account. Furthermore, the produced interaction
terms shall not crowd out the original variable. More will be said at interaction terms interpretation at results section.
19 Erb and Sulistiyanto (2009) mentioned that until 2008, 440 municipals/cities have conducted direct election for the head of governments.
20 The third milestone of Indonesia decentralization policy. This law remark the recent Indonesia’s decentralization agendas.
21 The presumption may correct in general but in some case, the voters may not aligned to their political party interest. The 2013 major election in Bandung

city was interesting since a non-partisan candidate won against the legacy of incumbent, that supported by strong political parties. Even though the turn out
rate only 57.6%, the voters seems only interest with candidate track record and personal appeal.
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parliamentary elections.
The harmonized independent and dependent variables forms the complete dataset. The dataset also include time-
variance control variables, which are; the logged per-capita intergovernmental transfers, logged per-capita GDRP, and
logged per-unit household expenditure. These variables should correct the issues of imbalance of fiscal capacity to
government expenditure. Table 1 presents the descriptive statistics of the dataset.
Table 1 Descriptive statistics
Variable N Mean SD Min Max

Direct transfer expenditure items

Grant expenditure 1976 -2.31 1.22 -6.86 3.53

Subsidy expenditures 721 -3.26 1.34 -7.59 0.95

Social Aids 2217 3.08 1.62 -3.61 7.83

Election items

Election year 3418 0.21 0.41 0 1

Incumbency 2578 0.21 0.41 0 1

HHI 3342 0.17 0.06 0.06 0.68

Control variables

Intergovernmental transfers 2084 14.34 0.77 11.52 17.37

GDRP 2503 15.3 1.23 12.18 19.54

Household expenditures 2502 13.21 0.35 12.2 14.52

3.3. Empirical Specification

The analysis begin with the following fixed-effect model:
𝑦𝑖𝑡 = 𝛼𝑖𝑡 + 𝛿 𝑡−1 𝐷𝑖𝑡−1 + 𝛿 𝑡 𝐷𝑖𝑡 + 𝛿 𝑡+1 𝐷𝑖𝑡+1 + 𝜏 𝑡 𝐼𝑖𝑡 + 𝜃 𝑡 𝐻𝐻𝐼𝑖𝑡 + 𝛿 ′𝑡 𝐷𝑖𝑡 × 𝐼𝑖𝑡 + 𝛿 ′′𝑡 𝐷𝑖𝑡 × 𝐻𝐻𝐼𝑖𝑡 + 𝜏 ′𝑡 𝐼𝑖𝑡 × 𝐻𝐻𝐼𝑖𝑡 + 𝜔𝑡 𝐷𝑖𝑡
× 𝐼𝑖𝑡 × 𝐻𝐻𝐼𝑖𝑡 + 𝛽 ′ 𝑥𝑖𝑡 + 𝛾𝑡 + 𝜎𝑖 + 𝜀𝑖𝑡
Where 𝑦𝑖𝑡 is the direct expenditures, which are grants, subsidies and social aids, at district i in year t. These
expenditures are modeled by function of election schedule (𝐷𝑖𝑡 ), incumbency (𝐼𝑖𝑡 ), and political cohesion (𝐻𝐻𝐼𝑖𝑡 ). The
model includes period of pre-election/lag of election schedule (𝐷𝑖𝑡−1 ) and period of post-election/lead of election schedule
(𝐷𝑖𝑡+1 ) to trace the cycles around election times. 𝑥𝑖𝑡 is a set of time-variant control variables, 𝛾𝑡 captures the time-fixed
effects and 𝜎𝑖 is the district fixed effects. The possible combinations of interaction terms among 𝐷𝑖𝑡 , 𝐼𝑖𝑡 , and 𝐻𝐻𝐼𝑖𝑡 also
employed at the model.
The value of 𝛿 𝑡 will inform us of the presence of the impact of the election cycles to the expenditures. 𝛿 ′𝑡 should
validate the first imposed hypothesis that participation of incumbent at election has an impact on the direct expenditures.
𝜔𝑡 presents the test of conditional hypothesis of incumbent participation to an election year, on affecting the direct
expenditures. The following reasons should support the logic of causal inference. First, the interested independent variables
are exogenously predetermined. Second, inclusion of time-fixed effects shall control the exogenous political and economic
shocks, i.e., 2009 global financial crisis, national election, drop of oil prices, and policy changes at central level. Likewise,
the model uses panel fixed-effect in order to eliminate any observed regional time invariant effects. Third, the inclusion of
dynamic variables that vary through time and region accounts at least an amount of omitted variable bias and any
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unobservable confounders. The standard errors are clustered at district level to handle any possible interaction within
observations and heteroscedasticity problems.

4. Results
Table 2 presents the main outcome of the empirical analysis. All estimations using OLS panel fixed-effects. The
tests for direct transfer expenditures are shown at column (1), (2), and (3).
Table 2 Election, Direct Transfer and Efficiency

(1) (2) (3) (4) (5)

VARIABLES Grants Subsidies Social Aids Education Health Spending

Spending Inefficiencies

Inefficiencies

Pre-election year -0.0329 -0.330 -0.061 0.000301 -0.00713

(0.122) (0.233) (0.126) (0.00598) (0.00497)

Election year -0.469 -0.406 -0.106 -0.0268*** -0.0322***

(0.285) (0.907) (0.240) (0.00973) (0.00993)

Post-election year 0.0824 0.0111 0.004 -0.00739* -0.00385

(0.0727) (0.159) (0.102) (0.00385) (0.00367)

Incumbency -0.142 1.137* 0.298 -0.00504 0.00740

(0.247) (0.577) (0.379) (0.0173) (0.0114)

HHI -3.071*** 0.947 -1.384 -0.372*** -0.219***

(1.171) (2.476) (1.805) (0.0667) (0.0445)

Election year * HHI 2.482* 1.883 1.073 0.0934** 0.118***

(1.432) (5.687) (1.149) (0.0381) (0.0425)

Incumbency * HHI 0.971 -4.087 -1.324 -0.00224 -0.0210

(0.996) (2.875) (1.715) (0.0824) (0.0542)

Election year *Incumbency 0.950** -0.667 -0.088 0.0291* 0.0232

(0.450) (0.986) (0.417) (0.0155) (0.0142)

Election year * Incumbency * HHI -5.035** 1.385 -0.416 -0.103 -0.134*

(2.087) (6.267) (1.972) (0.0651) (0.0714)

District Controls     

District FE     

Year FE     

Observations 930 351 991 1,193 1,193

R-squared 0.400 0.179 0.279 0.756 0.824

Number of Districts 320 185 300 320 320

Dependent variables in real terms (inflation adjusted) log per capita.

FE-OLS. Clustered standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1

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 There are no significant evidence of impact of election cycles (Election year/𝛿 𝑡 ) on these expenditures. The findings
inform us that the political business cycles not have any impact for direct transfer expenditure, since the first stated
hypothesis conjectures that incumbent maneuver causes the direct transfer’s variance, only an election which incumbent
participates has the impact but not overall election. The interaction terms of incumbency and election cycles (Election
year*Incumbency/𝛿 ′𝑡 ) shows the representation of incumbent that participate to election. 22 Only grant expenditures
(Column 1) have significant positive effects, with ten-percent confidence level. The coefficient implies that the incumbent
that participate on election spend grant expenditures more than the incumbent who does not. Figure 2 panel A plots the
marginal differences. The marginal effect of election when incumbent is running is 0.04. In contrast, the marginal effect of
election when incumbent is not running is -0.04. Even though that only a weak statistic discernible, the marginal differences
at least shows that, the incumbent spend grant expenditures more than non-incumbent at election year.
Next, we examine the validation of the second hypothesis. The second hypothesis emphasizes that political strengths
hinder the grant expenditures modification by the incumbents, which empirically observed through the magnitudes of 𝜔𝑡 .
The interaction term among election cycles, incumbency, and political strengths (HHI) corresponds to coefficients of 𝜔𝑡
(Incumbency * election year * HHI). The coefficient is -1.18 with 5 per-cent significant level. The negative sign tells us
that a high value of political strenght (HHI) trim down the positive effects of election year where the incumbent participates.
Figure 2 panel B shows a vibrant description about the coefficient interpretation. The figure presents the marginal
coefficients of election years by incumbency with one-standard deviation increase of political strenght (HHI). The grey
line shows the effect of supporting political party or coalitions, where the increase of political dominance is parallel with
the grant expenses at election year. This imply that the dominance political party or coalition seeks opportunity to intensify
their power at administration due to absence of the incumbent. The black line shows the contrary when incumbent running
for reelection. The incumbent under weak partisan promotion spent grants more than the strong promoted one do. At the
lowest HHI percentile, the marginal value of election year when incumbent participate is 0.31 with the 95% Confidence
Intervals (CIs) of [-0.20, 0.83] while at the highest HHI percentile is -1.22 with the 95% CIs of [-2.61, 0.17]. The statistics
support the second hypothesis, that is the insecure incumbent (who is under low political support) has a larger impact on
increasing the grant expenditures than the secure incumbent, that is blessed by a strong political support.

Figure 2 Panel A. Marginal Effect of Election year (by incumbency) to Grant Expenditure

Average Marginal Effects of Election Year with 95% CIs

0
incumbent

1
-.4 -.2 0 .2 .4
Effects on Linear Prediction

Figure 2 Panel B. Marginal Effect of Election year (by incumbency) to Grant Expenditure

22To forbid perfect collinearity, the produced interaction terms should not crowd out the incumbency variable. If the generation of incumbency variable only
covers at the election event, the effects of interaction terms is absorbed at constant term. Baleiras and Costa (2004) also discussed this issue.
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 Average Marginal Effects of Election Years to Grant Expenditures with 95% CIs

4
Effects on Linear Prediction

2
0
-2
-4

.064503 .1246553 .1848076 .2449599 .3051122 .3652645 .4254168 .4855691 .5457214 .6058737 .666026
Herfindahl-Hirschman Index

Incumbent not running Incumbent running

Figure 3. Panel A Marginal Effect of Election year to Spending Efficiency

Figure 3. Panel B Marginal Effect of Election year to Spending Efficiency

Average Marginal Effects of Election Years to Spending Inefficiency with 95% CIs
.1
Effects on Linear Prediction

.05
0
-.05
-.1

.064503 .1246553 .1848076 .2449599 .3051122 .3652645 .4254168 .4855691 .5457214 .6058737 .666026
Herfindahl-Hirschman Index

Incumbent not running Incumbent running

Figure 4 Panel A. Marginal Effect of Election year to Non-Capital Expenditure

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 Figure 4 Panel B. Marginal Effect of Election year to Non-Capital Expenditure

Average Marginal Effects of Election years to Non-Capital Expenses with 95% CIs

.5
Effects on Linear Prediction

0
-.5
-1

.0848 .1693147 .2538294 .3383441 .4228588 .5073735 .5918882 .6764029

Herfindahl-Hirschman Index

Incumbent not running Incumbent running

However, only grant expenditures shows the significant effect of opportunistic business cycles, the other types of
direct transfer expenditures such as subsidies and social aids do not showing any statistical evidence. Social aids and
subsidies are often become public interest, since these expenditures are vulnerable be abused by the incumbent. Any
peculiar jump especially in the vicinity of election days, would be suspicious to the audit committee or the government
opposition. Therefore, it is probable that the incumbent not only manipulate that recorded spending as a political money
but also the unrecorded spending. Unfortunately, as the term defines, the ‘unrecorded spending’ such as fictive spending,
mark-up budget, and unaccountable bills cannot be traced on the budget documentation, but undoubtfully some of the
unrecorded spendings may channel to incumbent campaign funds.
The article addresses the spending inefficiency to tackle the measurement of unrecorded spending in the next step. In
parallel with the current hypotheses, the opportunistic business cycles then contributes on the spending inefficiency. Boetti
et al (2009) show that the Italian municipalities spending inefficiency increase by the proximity of election period. Lewis
(2018) shows that the directly elected head of Indonesian local government is efficient on infrastructure, education, and
health spending. In order to measure the panel spending inefficiency, the time-variant stochastic frontier analysis is used.23
We measure the time-variant spending inefficiency in education and health sectors as the dependent variables (yit).
Education and health sector’s expenditures account around 20 to 30 percent of total government spendings. Since the
portion is large, such unrecorded spendings may presence at these sectors albeit the voters favor on these expenditures. The
data for measuring spending efficiencies and its calculation can be found at Appendix A. The tests of opportunistic cycles
to spending inefficiencies are presented in table 2 column (4) and (5).
The coefficients of election years/𝐷𝑖𝑡 are negative and significant at one-percent confidence level. These findings are
disagree with Boetti et al (2009) findings but coincide with Lewis (2018). In Indonesian local governments case, the
deviation from the best-practice frontier become smaller when forthcoming the election stage. Move to exploration of the
first hypothesis, if the incumbent extract the unrecorded spending for their campaign appeal then the high inefficiencies on
public spending are observed at election period where incumbent take a part. The coefficient of Election
year*Incumbency/𝛿 ′𝑡 is significant at inefficiency spending at education sector but not significant at health sector. 𝛿 ′𝑡

23 See Kumbhakar and Lovell (2004) for further explanation of time-variant stochastic frontier analysis.
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has value 0.03 and significant at ten-percent confidence level. The marginal effects of election cycles when incumbent is
running is 0.0007 with the 95% CIs of [-0.12, 0.13]. The marginal effects when incumbent is not running is -0.1 with the
95% CIs of [-0.020, -0.001]. Figure 3 panel A illustrates the marginal effect plot. The statistics imply that the non-running
incumbent is more efficient than the other one. In this sense, both incumbents may extracts an amount of unrecorded
expenditures, however the incumbent who not seek reelection take less than the incumbent who seek reelection.
The coefficients of 𝜔𝑡 (Incumbency * election year * HHI) are negative in both column (4) and (5). However, only
at column (5) is statistically significant at 10 percent level. The results are weak but enough to infer a causal inferences.
The results are supporting the second hypothesis, where the secure incumbent take less rent than the insecure incumbent.
If the spending inefficiencies tightly correlated with campaign funds, then the secure incumbent do not have to spend a lot
of campaign funds to get reelected, vis-a-vis; the insecure incumbent have to spend more campaign funds, which is obtained
by looting the public money.
Robustness Check
This paper exercises the dataset from Pierskalla and Sacks (2018) paper as robustness check.24 Their data covers
longer period (2001-2013) of observations. However, the data of direct transfer expenditures are not available on their
dataset. This paper chooses the variable of non-capital expenditures in their dataset as a proxy of direct transfer expenditures.
Non-capital expenditures or goods expenditures is expenditures to purchase goods and/or services that are used up to
produce goods and/or services that are marketed or not marketed as well as the procurement of goods intended to be
delivered or sold to the public. 25 The procured goods by these expenditures do not have any sustainable values as
assets/capitals do. Therefore, these expenditures have a potential as campaign’s tools by the incumbent. Figure 5 shows the
box plots for non-capital expenditures by year, for districts that have election cycles at 2003, 2008, and 2013. The median
of box plots shows a slight jump at the election year, implying a hint of increasing of non-capital expenditures in electoral
proximity.

Figure 5. Box plots for non-capital expenditures by year.

When preparing the data, the political strength’ variable (HHI) is not appear in their dataset, but they have Effective
Number of Party (ENP) in the dataset. Therefore, we take the inverse of ENP as HHI. Nevertheless, the HHI here is not
generated from shares of votes from a political party, but party’s shares of seat in municipal/city council. Following the

24 Pierskalla, Jan, 2017, "Replication Data for: "Unpaved Road Ahead: The Consequences of Election Cycles for Capital Expenditures"",
https://doi.org/10.7910/DVN/MP1NSJ, Harvard Dataverse, V1, UNF:6:lTyI7c0tY/K4hEW1Jnzafw== [fileUNF]
25 The definition comes from the Regulation of Ministry of Finance No 101 year 2011, Republic of Indonesia

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proposed empirical specification as mentioned in section three. The utilized control variables are similar with Pierskalla
and Sacks (2018). Table 3 shows the regression results using non-capital expenditures.
Table 3 Robustness Check

(1) (2) (3)

VARIABLES Non-Capital Non-Capital Total

Expenditure Expenditure Expenditure

Share

Pre-Election Year -0.0211 0.0003 -0.0199

(0.0171) (0.003) (0.0123)

Election Year -0.118* -0.00853 -0.0999**

(0.0665) (0.0119) (0.0417)

Post-Election 0.0224 0.00280 -0.00321

(0.0185) (0.00275) (0.0130)

Incumbent -0.224*** -0.0299** -0.0885*

(0.0695) (0.0140) (0.0536)

HHI -0.252 -0.0569 -0.00610

(0.192) (0.0377) (0.0935)

Incumbent * HHI 0.819** 0.0941 0.380

(0.325) (0.0601) (0.264)

Election year* HHI 0.470 0.0575 0.276

(0.329) (0.0594) (0.199)

Incumbency* election year 0.280** 0.0402* 0.132

(0.121) (0.0214) (0.0804)

Incumbency* election year -1.176** -0.159 -0.550

*HHI (0.582) (0.0989) (0.387)

District Controls   

District FE   

Year FE   

Observations 2,525 2,522 2,522

R-squared 0.157 0.339 0.426

Number of Districts 455 455 455

Dependent variables in real terms (inflation adjusted) log per capita.

FE-OLS. Clustered standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1

Column (1) shows the results when the real capital expenditures placed as dependent variables whilst in column (2),
the capital expenditures takes form as a share from total expenditures. Total expenditures in Column (3), act as placebo test
to see the overall effects. The results confirm our initial findings but from overall expenditures insight. In column (1) and
column (2), the coefficients of Election year*Incumbency/𝛿 ′𝑡 and Incumbency * election year * HHI (𝜔𝑡 ) are significant
positive and negative, respectively. Impact of election cycles to log percapita non-capital expenditures for non-running
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incumbent is -0.02, with 95 percent CIs of [-0.07, 0.02] where fot the running incumbent is 0.19, with 95% CIs of [-0.05,
0.89]. Figure 4 panel A plots the marginal effect of interaction terms between incumbency and election cycles. In the same
hand, figure 4 panel B plots the marginal effects of the triple interaction. For the running incumbent with strongest support
of political parties (extreme right), the marginal effects of election cycles is -0.32, with 95% CIs of [-0.74, 0.11]. Conversely,
marginal effects of election cycles for running incumbent with weakest support of political parties (extreme left) is 0.10,
with 95% CIs of [-0.01, 0.21]. In other words, the insecure incumbent exhibits larger spending for non-capital goods than
the secure incumbent, adjacent to election schedule.

5. Conclusion
This article provides an alternative direction of opportunistic business cycles. The traditional theories have ascribe
an increase of visible expenditures at election time due to re-election seeking incumbent. This article shows that the
incumbent simply increase the direct transfer expenditures, which tightly related to their campaign strategies, rather than
lay efforts on participating on visible investment projects by exerting capital spending. This phenomenon is spotted under
three circumstances. First, the voters should be myopic and loyal to their aligned political party. Second, the incumbent
possesses high incentive to be reelected, that is he not wish his alternative income aside of his current position. Third, the
incumbent has discretionary power to channel the direct transfer expenditures to their campaigning efforts, with less
suspicion from the opposition.
Conducting a natural experiment in the case of Indonesia’s local election, there are ten-percent differences of
election schedule impact to the grant expenditures via the participation of incumbent. The running incumbent spends more
grant expenditures than the non-running incumbent does in arbitrarily election period. Furthermore, the decreasing political
support from a party or coalition has pushed the participated incumbent to magnify these grant expenditures. Similar
occurrence also found at non-capital expenditures and technical efficiency spending at substantial sectors, which perceived
as financial source of incumbent campaigns.
The findings contribute for several strands of political economic literatures. First, it fills the gap in the literature
about the type of incumbent preferably choose in the election years. The paper notes that the incumbent place more effort
to expenditures that benefiting his election campaign, than accomplishing development goals during his term. Second, it
enrich the literature of political budget cycles by showing the example of the importance of incumbent participation. Third,
it speaks a relevancy to the corruption on the election process. The irresponsible incumbents may loot the public money
for their election campaign and expand their power by playing money politics. In addition, it questions the debates of the
effectivity and accountability of Indonesia’s local election (MacIntyre, 2000; Erb and Sulistiyanyo, 2009). This paper
provides an insight that incumbent has an absolute advantage for influencing the swing voters. Therefore, one policy
implication is placing incumbent and the challenger at the same position, for example forcing the incumbent step down
from the office one year before the election and delegating higher officials (provincial or national government elites) as
top decision maker on deciding budget at the election period. Other policy options are promoting e-budget in budgeting
process and enforcing accountability of candidate’s campaign funds.
Acknowledgments The author wish to thanks Nobuo Akai, Tetsuya Matsubayashi, Masayuki Kudamatsu, Stephan Litschig, Ahmad Zaky Zamani and

participants of OSIPP Brownbag Seminar for their valuable comments. The article also benefited a lot from the assistance of Jahen Fahrul Rizky and

Zaenudin.

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APPENDIX A: Efficiency Calculations

For observed public goods produces, the panel efficiency model takes form as follows:

𝑙𝑛𝐶𝑖𝑡 = 𝛽0𝑡(𝑗) + ∑ 𝛽𝑛𝑖𝑡(𝑗) 𝑙𝑛𝑋𝑛𝑖𝑡(𝑗) + 𝜀𝑖𝑡(𝑗) − 𝜇𝑖𝑡(𝑗)

𝑛

𝛽𝑖𝑡(𝑗) = 𝛽0𝑡(𝑗) − 𝜇𝑖𝑡(𝑗)

𝛽𝑖𝑡(𝑗) = 𝜔𝑖(𝑗)1 + 𝜔𝑖(𝑗)2 𝑡 + 𝜔𝑖(𝑗)3 𝑡 2
𝑇𝐸 = exp(−𝜇̂ 𝑖𝑡(𝑗) )

Where Cit(j) is policy objective j expenditure in municipal/city i at time t. Xnit(j) represents n output factors
that is a number of output product factor that provided by municipal/city government i at time t. is time-variant
random noise and 𝜇𝑖𝑡(𝑗) is time invariant inefficiency terms, both are assumed to be i.i.d.. The time-variant
inefficiency is defined as difference of maximum intercept of output factor with estimated intercept (𝛽̂0𝑡(𝑗) =
max 𝛽̂𝑖𝑡(𝑗) ) (Kumbhakar and Lovell, 2003).
𝑖
For the cost inefficiency of health services; immunization coverage, morbidity rate, and birth by nursery
are chosen as a proxy for goods or services on health produces with following health expenditure as observed
cost. For inefficiency of education services, Literacy rate and net enrollment ratio for elementary, junior high,
and high school level are the representatives of products of education service with following education
expenditure as observed cost.
The listed output products as a proxy of public service provided in these sectors are listed as follows:
 Percentage of children taking immunization: is a percentage of children taking immunization in the
nearest public hospital to a population of eligible children for immunization;
 morbidity rate: is a proportion with which disease appears in a population;
 Birth by Nursery: is a percentage of childbirth attended by an official nurse;
 NER elementary: is a percentage of children enrolled in elementary school to the population of children
of elementary school age;
 NER junior high: is a percentage of children enrolled in junior high school to the population of children
of junior high school age;
 NER senior high: is a percentage of children enrolled in senior high school to the population of children
of senior high school age;
 Literacy rate: is a percentage of literate people in the total population.

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 Efficiency variables Summary Statistics
Variables N Mean SD Min Max

Function expenditure (Procured Cost)

Education function spending (billion rupiah) 2176 259.47 230.48 0 3298.4

Health service function spending (billion rupiah) 2177 71.79 65.41 0 1777.82

Public Services Provided (Produced Output)

NER Elementary 3290 93.9 11.66 7 198

NER Junior high 3290 68.3 14.13 1 170

NER Senior high 3286 50.5 14.42 0 110

Literacy rate 3290 93 14.49 11 198

% Birth by nursery 3289 76.84 22.12 0 190

Immunization coverage 3290 93.9 13.48 3 198

Morbidity rate 2808 31.08 9.98 7 94

Efficiency Measurement

DepVar: Health SE DepVar: Education SE

Variables Expenditure Variables Expenditure

Immunization 0.16*** (0.07)NER Elementary 0.36*** (0.02)

Coverage

Morbidity rate 0.13*** (0.03)NER Junior High 0.72*** (0.01)

% Birth by Nursery 0.14*** (0.04)NER Senior High 0.13*** (0.01)

Literacy Rate 0.37*** (0.02)

t 0.09* (0.05)t 41.39*** (1.45)

t2 0.03*** (0.01) t2 20.93*** (0.72)

Constant 3.64***(0.30) Constant 1.05*** (0.13)

Observations 2,161 Observations 2,157

Number of id 488 Number of id 488

Log-Likelihood -944.8 Log-Likelihood -1996

lambda 0.26 lambda 0.51

TE Mean 0.58 TE Mean 0.35

S.D. 0.34 S.D. 0.29

All variables are taking logarithmic form. The estimators were carried using ML Time-Variant Stochastic Frontier. Standard errors in brackets; ***

denotes significance at 1% level, **at 5% and * at 10%.

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