WHERE DOES THE MONEY GO?

Indonesia allocates substantial intergovernmental transfers to local governments; nonetheless, the decrease in poverty remains limited. This dissertation posits that the binding constraint is institutional, specifically the regulations and incentives that dictate the extent to which funds are allocated from the government to designated programs. Institutional pass-through refers to the fraction of a transfer that is allocated to a program expenditure. The three essays integrate estimation, budget composition evidence, and a formal model to explain both modest average effects and heterogeneity across regions and programs. The first essay evaluates the impact of transfers on provincial poverty from 2001 to 2022 by employing instrumented variation derived from transfer formulas. Transfers are categorized into DAU, DAK, DBH, and Dana Desa to delineate distinct pathways. The instrument utilizes provincial populations as a formula driver and considers it exogenous to short-run poverty, conditional on fixed effects and variables. Findings indicate modest average effects that fluctuate according to the level of governance. The second essay evaluates whether transfers enhance pro-poor program initiatives or are redirected towards administrative functions and other noticeable yet less impactful categories. Fixed-effects estimates and heterogeneity regarding fiscal autonomy reveal composition alterations aligned with subdued pass-through, particularly in low-capacity environments. The third essay develops a theory in which a budget allocator faces audit intensity, procurement frictions, visibility incentives, and scale-seeking bureaucracy. The model defines pass-through, derives sufficient conditions for higher pass-through, and yields testable predictions about audits, earmarks, reporting, and implementation capacity. Conclusively, the essays explain why large flows can yield small poverty gains and (why effects strengthen where governance is stronger). Policy priorities emphasize raising pass-throughs rather than only enlarging transfers: strengthening audits and reporting, discipline administrative expansion, retain high-impact visible outlays, improve implementation capacity, and use earmarks selectively.