Municipal Mergers in Japan: How Did the Fiscal Incentives by the Central Government Affect Municipalities' Decisions?
46 Pages Posted: 15 Jul 2012 Last revised: 5 Aug 2012
Date Written: 2012
There was a large wave of municipal mergers in Japan from 2003 to 2006, which led to the swift, nationwide reduction of municipalities. An important feature was that the central government did not legally force consolidations. It instead provided municipalities with fiscal incentives to induce mergers and let each municipality decide whether to merge and with whom to merge. Two major incentives were the reduction of intergovernmental transfers and the provision of grants to merged municipalities. Although it appeared that the goal was to propel mergers in rural areas, it is not obvious why some municipalities chose to merge while other did not, how exactly the fiscal measures by the central government affected their decisions, and why the patterns emerged were in accordance with the goal of restructuring municipalities in rural areas. My paper aims at filling the gap between the government’s intention of curtailing small, rural municipalities and the actions taken by individual municipalities.
Building on Dur and Staal (2008), I argue that small, rural municipalities were reluctant to undergo mergers because they were small in number and would lose decision-making powers once they unified with their larger neighbors. Eliminating transfers to small municipalities and providing merged municipalities with grants increased the relative cost of remaining autonomous and served as a catalyst for mergers. However, the effects of these fiscal incentives were not uniform across small municipalities. I argue that they were less effective for small municipalities that were fiscally wealthy, as those municipalities already had sufficient revenues, relied less on transfers than other municipalities, and were able to pass on the incentives by the central government. I test my argument using monadic and dyadic datasets of municipalities. The findings are consistent with my argument.
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