Adi, Priyo Hari (2018) Rent-Seeking Behaviour in Local Government Budget in Indonesia. PhD thesis, Victoria University.

Abstract

Prior studies on government budget expenditure and its impact on government performance have demonstrated mixed results. Improper or inappropriate budget allocations can lead to opportunistic attempts to utilize these resources; this type of opportunism is known as rent-seeking behaviour. The objective of the study is to examine the determinants of rent-seeking, including such factors as grants from central government, local original revenue, natural resources revenue, population size, political factors and audit of government financial statement. While the majority of existing literature in this field surveys agency problems in the central government or at a national level, the current study contributes to the literature by investigating the agency problem in local government. In a decentralized government, where the authority is delegated to a local leader and local members of parliament, rent-seeking behaviour potentially arises as both of these parties have a conflict of interest. There is often a political motive when these parties run for election. Rent-seeking may potentially have an adverse impact on local government performance, and auditing has been shown to be an effective tool in reducing the agency problem and minimising rent-seeking. The current study addresses this issue by examining the role of auditing in minimising rent-seeking. This study employs the approach used by Park (2008), which is a revised model of the Katz and Rosenberg (1989) method, to measure potential rent-seeking. The data used in this study are the regional budget data (Anggaran Pendapatan dan Belanja Daerah/APBD) for the years 2007 to 2012 and also the reports of local financial audits for the years 2006 to 2011. The results of the study show there were some budget sectors that may have been regularly optimized for rent-seeking. In association with the determinants of the behaviour, there were some factors that influenced the potential rent-seeking significantly. The increase of local original revenue, natural resources and the election of legislative members are found to have a substantial impact on potential rent-seeking. However, the other result of this study shows that audit had an adverse effect on rent-seeking; this finding demonstrates the critical role of the audit to prevent the rent-seeking behaviour. From the perspective of agency theory, the results of the study provide an indication that rent-seeking behaviour does exist in local governments, since the leader of the government and the members of parliament have particular interests in utilizing the budget. In line with this theory, one of the ways to limit agency costs is by conducting an intensive audit. It is essential for local governments to strengthen their auditing activity in order to prevent high levels of dissipation of local budgets.

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