Local government expenditure and council size: Quasi-experimental evidence from Japan

Haruaki Hirota and Hideo Yunoue

MPRA Paper from University Library of Munich, Germany

Abstract: 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.

Keywords: fiscal common-pool problem; local council size; government expenditure; regression discontinuity design (search for similar items in EconPapers)
JEL-codes: D72 H11 H72 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-geo, nep-pbe, nep-pol and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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