Fiscal Competition of Public Expenses for Child Care among Local Governments

A Positive Analysis Using Cross Section Data of Japanese Prefectures

Abstract

This paper focuses on an optimal provision of public services for child care, considering them as local public goods. According to the fiscal competition theory, policy competition among local governments may not induce an optimal provision of local public goods. On the basis of this theoretical consequence, it examines, using an empirical method, whether or not public services for child care of local governments deviate from a level of optimal provision.
More specifically, I verify whether or not there exits strategic interaction on public expenses for child care among local governments, by using cross section data of Japanese prefectures and estimating linear reaction functions, based on the welfare competition model adopted by Wildasin (1991). From the positive analysis, it can be seen that there is “strategic complement" in the decisions making of local governments. I therefore point out that public expenses for child care can actually deviate from an optimal level.