_Keuangan Daerah_ , SIKD) of the Ministry of Finance.<sup>18</sup> District expenditures are available for 12 different sectors/functions (such as agriculture, health, education, etc.) and for four economic classifications (personnel, goods and services, capital, and other). District revenues are available from seven different sources, such as the General Allocation Fund (DAU), and the Special Allocation Fund (DAK), revenues from the balancing fund, shared taxes, and shared natural resources, and revenues from own sources, such as revenues from hotel and restaurant taxes, and motor vehicles.<sup>19</sup> All expenditure and revenue categories are expressed in per-capita terms by dividing by the district population size in the relevant year, and adjusted for spatial cost of living differences among districts and by the national consumer price index for changes in prices over time (base year 2007).<sup>20</sup>

# _Methodology_

We first establish that the timing of direct elections in the districts since the 2004 reform is a good “natural experiment” in the sense that it provides an “exogenous source of variation in the explanatory variables that determine treatment assignment”, thus allowing causal inferences (Meyer, 1995; Robinson et al. 2009). Our argument for exogeneity of treatment rests on two features: that direct elections in 2005 and later were held in the districts where the terms of the previous district heads were coming to full term; and that the cross-district variation in _when_ the previous district head’s term ended was due to historical differences in the timing of election (indirectly by DPRD) or appointment (under the New Order system) of that individual. To find evidence in favor of this argument, we would need to show that the timing of not only the direct election, but also the appointments of indirectly elected district heads, depends on the timing of the end of the previous head’s term. If this were true, and considering that the timing of district head appointments has varied across districts historically (see Table 1), it would support our claim that the timing of direct elections was exogenous.

As evidence, we first present estimates from a probit model of whether a district has had direct elections between 2005 and 2007 (as per Law 34/2004). The electoral reform of 2004

> 18 SIKD is a facility provided by the Ministry of Finance (MoF) to collect, validate, process, and analyze regional financial information. Regional governments have the legal obligation to report the data to MoF in a timely manner. Given that the budget format has changed at least twice during the 2001 to 2009 period, we use the district expenditure data from the Policy and Economic Research (DAPOER) data base, created painstakingly by the World Bank team in Jakarta. This data base contains district expenditures by sector and economic classifications that are consistent and comparable over time. 19 The expenditure data for 2001 to 2009 either by function or by classification are data on "realized" or actual expenditures as reported by the district governments.  The revenue data for 2001 to 2009 are also "realized" revenues. 20 In the absence of a national spatial cost of living index, the ratio of the district specific poverty line in 2007 to the average poverty line in the 6 districts in the Jakarta metropolitan area (DKI) in 2007 is used.

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