Timothée Demont : timothee.demont[at]univ-amu.fr
Alice Fabre : alice.fabre[at]univ-amu.fr
We study the effect of ethnic diversity on local public spending following fiscal decentralisation.The theory we develop highlights the role of the local elite in lobbying for policies which favour them. The differences in preferences over public good allocations across ethnic groups is exploited by the lobby; this results in ethnic diversity having a detrimental effect on local developmental spending. We test these predictions using Indonesian community-level data. Utilising the 1997 and 2007 Indonesian Family Life Survey (IFLS) rounds, we are able to construct various measures of ethnic diversity. Also, we exploit an institutional feature of Indonesian communities -- namely, the observance of traditional "Adat" laws to proxy the diversity in preferences across ethnic groups. Overall, we find that ethnic diversity depresses local democratic spending at the community level where Adat laws are not followed, which is consistent with our theory.