Intergovernmental Transfer and the Flypaper Effect – Evidence from Municipalities/Regencies in Indonesia

The purpose of this study is to identify and analyze the impact of the Intergovernmental transfer (Balance Fund) and Local Own Revenue to the local government expenditure as well as to know the occurrence of flypaper effect phenomenon in the relationship between those variables. This study is performed in two parts, firstly, using cross section data of 188 municipalities and regencies from 2006 to 2008, and secondly, using panel data of 484 Regencies and Municipalities during 2001 to 2008. The study showed that, firstly, Balance Fund and Local Own Revenue both partially and simultaneously have a significant impact on Local Government Expenditure. Second, the effect of Local Own revenue on Local Expenditure is stronger than the effect of Balance Fund. This proves the non-occurrence of flypaper effect in the local government response to the central government transfer fund.