Does Fiscal Decentralization in Indonesia have Asymmetrical Information?: Principal-Agent Model, Primal-Dual, and a Neural Network Analysis

Kun Haribowo

doi:10.20884/1.erjpe.2019.14.1.1271

Does Fiscal Decentralization in Indonesia have Asymmetrical Information?: Principal-Agent Model, Primal-Dual, and a Neural Network Analysis

Kun Haribowo

Abstract

In reality, subnational governments suffer from moral hazard, creating uncertainty which, in turn, causes economic inefficiency. The behavior of subnational governments cannot be observed by the central government. An analysis which takes into account this phenomenon is therefore needed. Decentralization implies delegating authority from central government to subnational governments. In this study, the subnational government is represented by the local government. This study utilizes a model of principal-agent. The central government acts as a principal who delegates fiscal authority to subnational governments who act as agents. By applying principal-agent model, we can use the primal-dual approach to analyze both revenue and expenditure assignment associated with the tax effort of the subnational governments. The result from artificial neural network approach shows that asymmetric information between central and subnational governments exists in Indonesia.

Keywords: Artificial Neural Network, Fiscal Decentralization, Local Tax Effort, Primal-Dual, Principal-Agent.

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DOI: https://doi.org/10.20884/1.erjpe.2019.14.1.1271