International Tax and Public Finance

, Volume 23, Issue 5, pp 812–833 | Cite as

Amalgamation, free-rider behavior, and regulation

  • Katsuyoshi Nakazawa


Amalgamation incentivizes municipalities to increase public debt because it allows them to subrogate their repayment and interest burden on the entire municipality after amalgamation. Smaller municipalities, in particular, tend to accumulate public debt in order to free-ride. Previous studies have shown this kind of opportunistic behavior in countries where municipalities can issue bonds freely in the market. However, in Japan, municipalities cannot issue bonds freely by regulation. When such regulation controls debt accumulation by the merging municipality, the free-rider effect should be weak. This study examines the relationship between the regulation of local government borrowing and free-rider behavior of Japanese municipalities. The difference-in-difference regression results confirm the existence of a free-rider effect in this regard. Moreover, the debt expenditure ratio, the index of the regulation of local public bond issues, has the same effect that prevents local public debt from increasing for both merging and never-merged municipalities. This fact shows that a merging municipality with a free-rider incentive cannot increase local public debt to excess by using the regulation. Therefore, the average free-rider effect per capita is approximately 7 % of the average local public debt per capita for the end of the pre-treatment period. This result is considerably lower than the effects of the Swedish cases.


Amalgamation Free-rider behavior Common pool   Difference-in-difference Fiscal policy Local public debt 

JEL Classification

D72 H72 H73 H74 R51 



This paper has greatly benefited from the comments of the editor-in-chief, Bob Chirinko, and three anonymous referees.


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Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  1. 1.Department of EconomicsToyo UniversityTokyoJapan

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