Does Fiscal Decentralization in Indonesia have Asymmetrical Information?: Principal-Agent Model, Primal-Dual, and a Neural Network Analysis

Kun Haribowo

doi:10.20884/1.erjpe.2019.14.1.1271

Abstract

In reality, subnational governments suffer from moral hazard, creating uncertainty which, in turn, causes economic inefficiency. The behavior of subnational governments cannot be observed by the central government. An analysis which takes into account this phenomenon is therefore needed. Decentralization implies delegating authority from central government to subnational governments. In this study, the subnational government is represented by the local government. This study utilizes a model of principal-agent. The central government acts as a principal who delegates fiscal authority to subnational governments who act as agents. By applying principal-agent model, we can use the primal-dual approach to analyze both revenue and expenditure assignment associated with the tax effort of the subnational governments. The result from artificial neural network approach shows that asymmetric information between central and subnational governments exists in Indonesia.Keywords: Artificial Neural Network, Fiscal Decentralization, Local Tax Effort, Primal-Dual, Principal-Agent.

Highlights

The role of the government is the redistribution of income, the provision of public goods and social protection (Gramlich, 1990)
Binner et al (2004) predicted the occurrence of inflation and compared models of Vector Autoregressive (VAR) and Recurrent Neural Network (RNN) for the same data, in which the results showed that the RNN model error value is smaller than the VAR model
The results of the analysis showed that using the backpropagation method would reach minimum of mean square error (MSE) and the sum square error (SSE) when using certain amount neurons in the hidden layer

Summary

INTRODUCTION

The role of the government is the redistribution of income, the provision of public goods and social protection (Gramlich, 1990). The central government wants a condition in which the transfer of the balance of funds will go down as the increase in local revenue by giving a wider discretion in taxes and levies. E=1/α, is the same in both solutions, primal and dual In this condition, the central government, as principal, has the same information with the information held by the local government as an agent. The explanation proves that the primal-dual can be applied for the implementation of fiscal decentralization in Indonesia between the central government as a principal with the local government as an agent. These results need to be tested with data on the implementation of decentralization in Indonesia. Binner et al (2004) predicted the occurrence of inflation and compared models of Vector Autoregressive (VAR) and Recurrent Neural Network (RNN) for the same data, in which the results showed that the RNN model error value is smaller than the VAR model. Mirmirani and Li (2004) predict the movement of oil prices in the US by using the VAR model and Back Propagation NN for comparison, which shows that the NN models have a smaller error value than the VAR model

METHODS

RESULT

CONCLUSION