Expenditure Assignment in Korea: Does It Spur Regional Concentration?

In the local public finance literature, it is well known that the high net fiscal benefit of a local government attracts immigration into the region. Therefore, the structure of local public finance can play an important role in causing the agglomeration of a local government. This paper draws upon this fact, and addresses the policies of fiscal decentralization and balanced regional development currently being pushed very rigorously in Korea. In particular, this paper estimates the demand for local public goods in Korea, and finds that the congestion effect of local public goods provision, the key parameter that links the two policies, is significantly below one. This is because, unlike other countries such as Japan, United Kingdom, and Spain that are surveyed in this paper, local governments in Korea do not provide important publicly provided private goods such as education, police, and welfare programs. The implication of the finding is that, to avoid the agglomeration of Seoul metropolitan area, which is arguably the biggest in the world, we need to strengthen the link between the fiscal capacity and expenditure responsibilities of local governments