The main objective of this study is to analyze the flypaper effect, namely the effect of local revenue, unconditional grants, and residents, on regional expenditure in Indonesia, namely the western region of Indonesia and the eastern region of Indonesia which is moderated by the institution. The population in this study were all cities in Indonesia, namely 32 capitals. This study was conducted with secondary data in the form of a cross section during 2016, because institutional data proxied as an index of regional economic governance was only available in that year.

The data used is secondary data in the form of quantitative data which includes regional expenditures, local revenue, unconditional grants, residents and institutions. This data comes from the central statistical agency and the committee to monitor the implementation of regional autonomy.

The results showed that the flypaper effect had an impact on increasing regional expenditure in western Indonesia and eastern Indonesia with an increase that was higher than the increase in regional original income in response to transfers. It can be understood that local governments are more responsive to transfer funds in increasing regional spending. However, on the other hand, institutions have a negative and significant effect on the relationship between unconditional transfers and regional expenditures. This suggests that institutions with good governance lead to less and less unconditional transfers used for regional expenditure. This means that the role of institutions causes the flypaper effect to be reduced. This indicates that institutions that have good governance are able to increase local revenue.

Keywords: flypaper effect, local revenue, unconditional grants, residents, institutions, regional expenditure