Strategic Intergovernmental Competition in Japan's Hometown Tax Donation System (Furusato Nozei): A Hotelling-Type Model with Household Attachment

This study theoretically and empirically examines competition among local governments in Japan's hometown tax donation system (Furusato Nozei) using a Hotelling-type model. This study makes four main contributions. First, it develops a simplified Hotelling-type model that incorporates household attachment to local governments in an economic space with donor households and multiple local governments, thereby capturing strategic competition over donation prices. Second, it analyzes the strategic behavior of local governments under the hometown tax donation system within the frameworks of Bertrand and Stackelberg competition. Third, it identifies the effects of policy parameters on equilibrium donation shares through comparative static analysis and verifies these results using numerical simulations. Fourth, using prefecture-level data, it conducts an empirical analysis based on a two-stage least squares (2SLS) method to address potential endogeneity of donation prices, confirming that the theoretical sign conditions of the donation share function are supported by the data. The results indicate that higher marginal costs reduce donation shares, while stronger brand strength of reciprocal gifts and greater household attachment increase donation shares, yielding important policy implications for the design of the hometown tax donation system.