Local government expenditure and council size: Quasi-experimental evidence from Japan
In order to evaluate a fiscal common-pool problem, this paper focuses on the relationship between local government council size and its expenditure. Generally, local councilors internalize the benefit of public projects targeted at their political jurisdictions, but underestimate and prefer to externalize the cost of public projects due to the national subsidy system. When council sizes become larger, their expenditure might be larger because of the selfish behavior of local council members. This paper estimates the positive effect of local council size on local government expenditure using a dataset of 13,989 municipalities in Japan over a period of 6 years. In Japan, local council size is a deterministic and discontinuous function of municipal population size under legal rules. We pay attention to this exogenous discontinuity and apply a regression discontinuity design to consider an endogeneity bias. The results show that the larger the size of the local council the larger the size of expenditure they undertake. In particular, we find that growing small municipalities tend to increase their expenditures, so that for example, 1% increases in local council size lead to about 1.2% increases of expenditures by small municipalities. Our results show that the fiscal common-pool problem is produced in small municipalities.
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