Political power, economic trade-offs, and game theory in Indonesian gasoline subsidy reform

Gasoline subsidies distort the gasoline market resulting in inefficiencies and a costly burden in government budget. In Indonesia, they have taken up to 15 % of the government expenditures that arguably could be better spent elsewhere. Governments are aware of these costs, yet face difficulties in removing the policy. Governments would like to release the subsidy fund for other programs while still maintaining political power. Simultaneously, a reform will reduce the purchasing of the population and thus, it is commonly met with strong public resistance. The general population can influence the government's decision to carry out a reform by exerting pressure that may affect the country's political stability. There is a vast economics literature analysing the economic impact from a subsidy reform. Meanwhile, the government's hesitancy is analysed in the political science literature. We combined these two fields by developing a quantitative game theory model to show the interaction between the government and the general population. The model is based on Indonesian data but provides a framework that can be applied elsewhere. Different policy removal schemes are simulated including completely or partially phasing-out the subsidy with and without compensation. An important take-away from our analysis is that it provides a framework showing governments what they have to quantify in order to make an informed policy decision. Another important implication is that the success of the policy reform is highly dependent on the selectorates trust to the government. It strongly supports the political science recommendations of building trust through transparency and inclusion.