Political business cycles in local Indonesia

Abstract

We study political business cycles (PBC) in newly democratized and decentralized Indonesia at the local level. As the timing of indirect and later on direct elections of district heads differs exogenously across jurisdictions, the political business cycle effect is clearly identified . Our data allow distinguishing PBCs for indirect and direct elections. We find significant budget cycles for discretionary budget categories at the disposal of the district head (not for the overall budget) only for direct elections, not for indirect elections. These cycles are much larger if the incumbent runs for reelection. Our results underline the conditional nature of PBC.