During the late 1990’s Indonesia embarked upon major political, governance and fiscal reforms. As part of the reform the central government transferred almost all functions to district governments. A new system of intergovernmental transfers has been established to finance the functions transferred to districts. The new transfers consist of Revenue Sharing (DBH), General Allocation Funds (DAU) and Special Allocation Fund (DAK). Since 2004 another part of the reform has been the change in the electoral system of the president from parliamentary election to direct election by the people. Within this context, I examine whether intergovernmental transfers in Indonesia were manipulated in order to pursue the political interests of the president.

I employ regression discontinuity design (RDD) on data set of transfer to district government during the period of 2005–2013, and presidential elections results at district level in the electoral years of 2004 and 2009. I find that district government regions - where the current president barely wins in the most recent election - receive a larger Special Allocation Grant (DAK) by 44.4 percentage points within the overall period of the sample. I also find that the incidence and magnitude of this political manipulation is greater in the final two years of the presidential term. These findings lend support to the ‘core voter’ model (Cox and McCubbins 1986) and the ‘opportunistic political business cycles’ in the literature (Brender and Drazen 2005). I argue that the complexity and size of a transfer formula contribute to the level of incidence and magnitude of political manipulation. Large transfers are less prone to manipulation because they attract more public attention, whereas transfers with complex allocation formula is more vulnerable to manipulation, given that it is more difficult to calculate and track the consistency of its allocation. The results of this study add empirical evidence to the literature which has shown that formula-based transfers are not resistant to political manipulations (Banful 2011; Caldeira 2012; Litschig 2012).