Ethnic Diversity and Village Level Institutions: Evidence from Indonesia Under Dictatorship and Democracy

Abstract

This paper studies the variation in village head selection rules across Indonesia using a panel over 1997-2007. I find evidence that heterogeneity across Indonesian villages can explain variation in local level institutions. In particular, ethnically diverse Indonesian villages are more likely to have appointed village heads, whereas homogenous villages are more likely to directly elect their leaders and thus, retain political power. Moreover, using a lagged measure of ethnic diversity as an instrument provides evidence that the ethnic diversity caused the change in a village’s institutions following the fall of Suharto. That ethnically diverse villages have no de jure political power of selecting their village head suggests the costs of retaining political power in ethnically fragmented villages are high. These results hold whilst controlling for urban-rural location, hitherto thought of as determining local institutions.

Keywords: Political Economy, Institutions, Ethnic diversity, Indonesia

JEL Classification: H73, P51, R58