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Amalgamation, free-rider behavior, and regulation

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  • Katsuyoshi Nakazawa

    () (Toyo University)

Abstract

Abstract Amalgamation incentivizes municipalities to increase public debt because it allows them to subrogate their repayment and interest burden on the entire municipality after amalgamation. Smaller municipalities, in particular, tend to accumulate public debt in order to free-ride. Previous studies have shown this kind of opportunistic behavior in countries where municipalities can issue bonds freely in the market. However, in Japan, municipalities cannot issue bonds freely by regulation. When such regulation controls debt accumulation by the merging municipality, the free-rider effect should be weak. This study examines the relationship between the regulation of local government borrowing and free-rider behavior of Japanese municipalities. The difference-in-difference regression results confirm the existence of a free-rider effect in this regard. Moreover, the debt expenditure ratio, the index of the regulation of local public bond issues, has the same effect that prevents local public debt from increasing for both merging and never-merged municipalities. This fact shows that a merging municipality with a free-rider incentive cannot increase local public debt to excess by using the regulation. Therefore, the average free-rider effect per capita is approximately 7 % of the average local public debt per capita for the end of the pre-treatment period. This result is considerably lower than the effects of the Swedish cases.

Suggested Citation

  • Katsuyoshi Nakazawa, 2016. "Amalgamation, free-rider behavior, and regulation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(5), pages 812-833, October.
  • Handle: RePEc:kap:itaxpf:v:23:y:2016:i:5:d:10.1007_s10797-015-9381-0
    DOI: 10.1007/s10797-015-9381-0
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    References listed on IDEAS

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    Cited by:

    1. Nakazawa, Kasuyoshi, 2016. "Identifying Discretion of Municipalities to Undertake Eligibility Assessments for Japan’s Long-Term Care Insurance Program," MPRA Paper 75565, University Library of Munich, Germany.
    2. Blesse Sebastian & Rösel Felix, 2017. "Was bringen kommunale Gebietsreformen?: Kausale Evidenz zu Hoffnungen, Risiken und alternativen Instrumenten," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 18(4), pages 307-324, November.
    3. Hirota, Haruaki & Yunoue, Hideo, 2017. "Evaluation of the fiscal effect on municipal mergers: Quasi-experimental evidence from Japanese municipal data," Regional Science and Urban Economics, Elsevier, vol. 66(C), pages 132-149.
    4. Köppl Turyna, Monika & Pitlik, Hans, 2016. "Do equalization payments affect subnational borrowing? Evidence from regression discontinuity," MPRA Paper 73749, University Library of Munich, Germany.
    5. Nakazawa, Katsuyoshi, 2016. "Free-rider behavior under voluntary amalgamation: The case of setting the long-term care insurance premium in Japan," MPRA Paper 75147, University Library of Munich, Germany.
    6. Blesse, Sebastian & Baskaran, Thushyanthan, 2016. "Do municipal mergers reduce costs? Evidence from a German federal state," Regional Science and Urban Economics, Elsevier, vol. 59(C), pages 54-74.
    7. Saito, Hitoshi & Hirota, Haruaki & Yunoue, Hideo & Miyaki, Miki, 2017. "Does municipal mergers internalize spatial spillover effects? Empirical evidence from Japanese municipalities," MPRA Paper 76833, University Library of Munich, Germany.
    8. Katsuyoshi Nakazawa, 2013. "Municipality amalgamation and free-ride behavior: Eligibility assessments for long-term care insurance in Japan," MAGKS Papers on Economics 201340, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    9. Sebastian Blesse & Felix Rösel, 2017. "Gebietsreformen: Hoffnungen, Risiken und Alternativen," ifo Working Paper Series 234, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.

    More about this item

    Keywords

    Amalgamation; Free-rider behavior; Common pool; Difference-in-difference; Fiscal policy; Local public debt;

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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