Compensating differentials in rents, wages and agricultural returns: the quality-of-life among Indonesian regencies and cities

Abstract It has long been challenging to assess local residents’ quality of life, which is affected by numerous natural and man-made amenities. We develop a novel compensating differential model of quality-of-life rankings applicable to developing countries by introducing farm income into the household budget alongside housing and labour market differentials. We apply this model to Indonesia using detailed household data from the Indonesian Family Life Survey for two different time periods and combining estimates of agricultural, off-farm labour and housing market differentials. We find heterogeneous amenity impacts across the agricultural and off-farm labour sectors. We use our model to show how significant changes in rankings across time are consistent with contemporaneous internal migration patterns in Indonesia. These rankings yield important information for policymakers on expected changes in migration and can be used to help inform public investment.