| Summary: | Fiscal decentralization provides lower levels of government greater authority over
fiscal policies through expenditure assignment and revenue assignment. Those
authorities give lower levels of government more opportunities to afford better public
goods and service delivery that meets the local preferences and needs. The
devolution powers over fiscal policies are believed by some scholars as a perfect
instrument to boost economic performance and to improve nation welfare,
particularly in reducing regional income inequality. Otherwise, there are also
possibilities that fiscal decentralization will lead to increase regional income
inequality. The competition among regions using fiscal instruments would make it so
that poorer regions could not compete with richer ones, hence the redistribution of
income could not be properly addressed.
The intend of this research is to shed some light on the relationship of fiscal
decentralization and regional income inequalities. The empirical analysis is carried
out using panel data reviewed for over 33 provinces in Indonesia from year 2005
until 2011. The proxy for fiscal decentralization is intergovernmental transfer, while
the proxy for regional income inequality is the Gini index. The findings of this
research suggest that the fiscal decentralization negatively affects regional income
inequality during the observation period. Therefore, greater fiscal decentralization
will lead to more equality on income distribution.
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