Sources of spatial welfare disparities in Indonesia: Household endowments or returns?

This article investigates (i) the extent to which the differences in the standard of living among districts in Indonesia are due to differences in the marginal welfare gains (returns) associated with household mobile endowments or differences in household endowments themselves; and (ii) whether the current allocation of fiscal expenditures by the central authorities is related to the main determinants of the spatial disparities in welfare among districts. Differences in the returns to household mobile characteristics are found to be the primary explanation of the welfare differences. The allocation of fiscal transfers to districts is found to be based on “needs” defined as low returns to household mobile endowments. This also suggests that the design of the fiscal transfer system is consistent with promoting the opportunities for welfare across districts as opposed to equalizing the level of welfare itself. Finally, the marginal welfare gains of most household mobile endowments are found to be higher in districts with more roads.