Corruption and Business Uncertainty in Indonesia

The main purpose of the paper is to analyse the local business environment in Indonesia after decentralization. Corruption or rent-seeking behaviour is focused on bribery and the market for local (district) government regulatory goods such as business licence, fire safety inspection, compliance to environmental regulations, local tax appraisal, building permits, and employment contract inspection. We abstract from other rent-seeking activities like lobbying governments for particular projects, industrial protection, and exclusive monopoly rights. In the model, government regulation can be customized to extract rent. A firm has to spend time and money to reduce its burden. The paper uses a method based on the standard theory in economic analysis that a firm would engage in negotiation if the burden is sufficiently high, and only if the marginal effectiveness of bribes after taking into account uncertainty exceeds the marginal cost of bribes in negotiation. The empirical results of the model suggest that uncertainty plays a significant role in affecting bribe level. In addition, from the way the uncertainty variable is constructed, there is also an indication that some fragmentation of bribe collection system has taken place.