Analysis of the Soft Budget Constraint Problem in the Local Allocation Tax: Determinants of "modification coefficients" in Ordinary Expenditure (in Japanese)

It is pointed out that the Local Allocation Tax (LAT), an intergovernmental fiscal transfer aimed at offsetting and balancing the disparity between expenditure and revenue in local governments, relates to efforts to increase tax revenue and mitigate expenditure. According to Ikegami (1998) and (2003) and Akai et al. (2003), "modification coefficient" used to adjust for the impact of physical, institutional and regional characteristics on provision costs of local government services is altered based on requests from local governments in a manner that permit their wasteful spending and the soft budget constraint problem arises in determination of modification coefficient. This work investigates whether the soft budget constraint problem arises under changes in modification coefficient and local governments engaging in inefficient provision of public services are provided additional resources through change of coefficient. Two main results are obtained. First, in police expenses, elementary and junior high school expenses and public hygiene and sanitation expenses, local governments that incur high costs in public service provision could improve the estimates of LAT by changing modification coefficient. Second, in elementary and junior high school and public and sanitation expenses, the disparities of coefficients among local governments became larger while inefficient local governments could increase their modification coefficients.