Degree of Fiscal Decentralization and Flypaper Effect: Evidence from Indonesia

The existence of flypaper effect phenomenon in Indonesia has not been fully answered completely because the findings of the studies on this subject were no unidirectional. Some researchers discovered the existence of flypaper effect, while some other studies did not find the phenomenon. This study investigates the presence of flypaper effect and its impact on public welfare using data covering all counties and cities in Indonesia from 2010 to 2013. To test hypotheses, we first group districts based on the degree of fiscal decentralization and than test the existence of the flypaper effect and its impact on public welfare simultaneously on each of fiscal decentralization degree. Partial Least Square release 5 is used to test hypotheses. The results show that the general allocation fund effects significantly on capital expenditure for all of the degree of fiscal decentralization. District own-source revenue significantly affects the capital expenditure only for the districts with an extreme degree of fiscal decentralization. The phenomenon of flypaper effect is really happening in the autonomous districts of Indonesia. The positive impact of capital expenditure on the welfare of the community is also found in district with extreme degree of fiscal decentralization.