The Empirical Analysis on Official Pay Cut in Local Governments

Abstract

This paper investigates the vertical effect and reference behavior on municipal personnel expenditure influenced by the factor of prefectural and central governments. We focus on personnel expenditure after the great east Japan earthquake in 2011. After that, central government in Japan strongly required local governments to follow official pay cut. This shock gave rise to varied responses from local governments. We found that municipal personnel expenditure is influenced by the factor of partisanship of pay level in prefectural governments. Our examination indeed shows that there is such vertical fiscal interdependence that hasn’t been examined by previous studies in fiscal economics.