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The main objective of this paper is to clarify the influence of fiscal decentralisation and ethnic diversity on Indonesia’s educational outcomes using Indonesian provincial-level data from 2001 to 2014 and applying dynamic panel data estimation. This paper takes into account that ethnic diversity mediates the relationship between fiscal decentralisation and educational outcomes. The result confirms that the inclusion of the ethnic diversity variable lessens the positive influence of fiscal decentralisation on educational outcomes. The presence of a diversity debit hypothesis in Indonesia overshadowed the local government’s effort in improving regional educational outcomes through decentralisation. This paper proposes a set of policy recommendations based on empirical results to assist the local government in controlling the adverse effect of ethnic diversity on regional educational outcomes.
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