Municipal mergers and special provisions of local council members in Japan

The number of municipalities in Japan has decreased from 3,232 in 1999 to 1,820 in 2006 because of municipal mergers, called Heisei-no-Daigappei. This paper estimates the political choices of local council members in Japan’s municipal mergers. In Japan, being a local council member is a full-time job. The local council has “veto powers” over local administration. Since the wage for a local council member is quite high, council members like to keep their seats. The jobs of local council members are affected by municipal mergers, as preferential treatment and penalties are delivered by the central government to the local government in municipal mergers. In our results, merged municipalities apply “Special Provisions” for local council members because of the size of the municipality. The choice of municipality is also affected by the national government’s political power. In addition, Special Provisions lead to additional fiscal burdens. These fiscal burdens will transfer to the whole country because “the Local Allocation Tax grants system” (abbreviated as LAT grants), a national grants system, works well in Japan. The municipalities that choose the Special Provisions exploit the benefits from other municipalities without any additional costs. Our results show that the central government induces the free-rider problem in Japan