Hometown Tax Donation (Furusato Nozei) and Reciprocal Gift Consumption in Japan -Economic Analysis of Brand Power and Transportation Costs-

This study develops a theoretical model based on the optimization behaviors of households and local governments for the hometown tax donation (Furusato Nozei) system in Japan, which has garnered attention as a new means of obtaining financial resources for local governments. Further, it conducts theoretical, numerical simulation, and empirical analyses. This study is the first to apply the Krugman model, which focuses on brand power and the transportation cost of reciprocal gifts and addresses differentiated goods and spatial trade. The empirical analysis targets municipalities in Hokkaido because of (1) the brand power of Hokkaido products and (2) the fact that transport to Honshu is almost exclusively limited to airports and ports; thus, transportation costs can be analyzed. This study is also the first to use the transportation distance of reciprocal gifts measured using a road network. Comparative statics analysis based on the theoretical model revealed the following trends: Higher reciprocal gift prices reduce reciprocal gift consumption but have an indeterminate impact on donation amounts; stronger brand power increases both donation amounts and reciprocal gift consumption; and higher transportation costs reduce reciprocal gift consumption. Reciprocal gift ratio, brand power, and transportation costs also affect the optimal reciprocal gift price. Finally, the empirical analysis based on municipal data for Hokkaido confirms that the price of reciprocal gifts does not significantly affect donation amounts and negatively affects reciprocal gift consumption, whereas the number of reciprocal gift types (a proxy variable for brand power) positively affect both donation amounts and reciprocal gift consumption. Transportation distance to airports and ports negatively affects both, which is consistent with the results of the theoretical model.