Decentralization Policy and Prospect Theory

Abstract

The decentralization could be considered as one of the risky policies for the ruling party in Japan because the voters have little interests in it and the many pressure groups are against it. But the DPJ (The Democratic Party of Japan) central government (2009-2012) decided to promote decentralization. How can we explain the decision making process? Using the behavioral economic theory "Prospect Theory" that describes how people make decisions under conditions of uncertainty, this articles shows that, as the support for the DPJ central government was getting worse and worse, the ruling party turned to be the risk-loving player who is willing to take more risks in order to earn higher returns and then decided to decentralize the central government's authorities.