BESS - The Public Morals - Public Services Tradeoff: Theory and Evidence from Sharia Regulations in Indonesia

Campaigning on value-based and highly divisive issues can serve as a cheaper alternative to provision of goods and services, so politicians have an economic incentive to cater to hardliners. A voting model is used to examine this idea, and its predictions are tested using Indonesian data. About half of the district governments in Indonesia have been experimenting with Sharia-based religious policies since 2000. Their negative impact on government expenditure and services, which is the main prediction of the model, is identified using difference-in-differences and instrumental variables methodologies. The conservative estimate is a 10% loss in both spending and the value of the government services index. A model-based calculation using ex-post electoral performance of incumbents suggests that the direct welfare loss of secular voters due to Sharia policies can be four times as much as they lose through the public morals - public services substitution.