This paper presents the concept of fiscal effects of public investment, which explains an employment effect in public sector and fiscal flexibility, in the non-metropolitan area that consists of well-developed part and under-developed part. We point out that we must analyze two trade-off problems; one is regional equities versus total development of prefecture; the other is developments effects versus fiscal flexibility, which gives main perspective for the public debt management. For this analysis, an econometric model having hierarchical structure between prefectural government and sub-areas is presented. By case study in Shiga prefecture, the validity of the model is evidenced and some comments about investment allocation and public debt management are proposed.
