Empirical Economics

, Volume 54, Issue 3, pp 1061–1086 | Cite as

Internalization of externalities and local government consolidation: empirical evidence from Japan

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Abstract

The fact that jurisdictional consolidation overcomes externality problems in the provision of local public goods is one of the best-known benefits of consolidation in the theoretical literature. Nevertheless, previous studies provide little evidence of how public service spillover effects influence consolidation decisions. This study empirically tests the hypothesis that spillovers induce consolidation, using voting data on the consolidation of Japanese municipalities. The extent of spillovers is measured by estimating the demand function for public goods with externalities. It is found that residents of the municipalities that can internalize a large amount of public goods spillovers through municipal consolidation tend to favor consolidation. This result supports the theoretical inference that spillovers in local public goods affect utility gains from jurisdiction integration, thus serving as one of the key impetuses for boundary reform. Moreover, after controlling for the spillover effects, economies of scale, population share, differences in median income, and unconditional grants can help explain consolidation preference.

Keywords

Externalities Internalization Local public good Municipal consolidation Spillovers 

JEL Classification

H11 H76 H77 

Notes

Acknowledgements

I would like to thank Nobuo Akai, Haruaki Hirota, Kazuko Nakata, and the participants at the seminar at Doshisha University, Kyoto (February, 2012), the 68th Congress of the International Institute of Public Finance at Technische Universitat, Dresden (August, 2012), and the 2012 Autumn Japanese Economic Association Meeting at Kyushu Sangyo University, Fukuoka (October, 2012) for their helpful comments. This work was supported by the Japan Society for the Promotion of Science Grant-in-Aid for Young Scientists (B) 22730256.

Supplementary material

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Copyright information

© Springer-Verlag Berlin Heidelberg 2017

Authors and Affiliations

  1. 1.Department of EconomicsKyushu UniversityFukuokaJapan

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