Fiscal decentralization, governance, and corruption: evidence from Indonesian local governments (2010–2021)

The purpose of this research is to explore the interaction between fiscal decentralization and governance, which jointly affect the level of corruption in local governments in Indonesia. By utilizing panel data from 548 district/municipal governments during the period from 2010 to 2021, this research aims to examine the impact of Local Own Source Revenue (LOSR), Balance Funds, and budget efficiency on the level of corruption. Governance is captured by audit reports of internal control weaknesses. By utilizing panel regression, this research explores the direct and moderating effects of governance. The results indicate that LOSR and budget efficiency are negatively related to the level of corruption, whereas Balance Funds are positively related to the level of corruption. Governance moderates the anti-corruption impact of budget efficiency but surprisingly exacerbates the pro-corruption impact of LOSR and Balance Funds. Further robustness checks indicate the existence of different misuse vulnerabilities for General Allocation Funds (GAF) and Special Allocation Funds (SAF). This research extends the existing literature on fiscal decentralization by exploring the interaction between different fiscal decentralization instruments and the level of corruption.