Public Investment in Japan and Public Choice

Abstract

　The purpose of this paper is to reinvestigate the relationship between public investment in Japan and politics from the viewpoint of public choice. For this aim, I look at the data on public investment in Japan mainly since 1980's both at the macro and regional level using figures of Administrative Investment published by Ministry of Internal Affairs and Communication. Moreover, I review previous studies which focused on public investment from the viewpoint of public choice including literature on ‘Political Business Cycles’ and ‘Pork Barrel Politics’. After that, I conduct empirical analysis using panel VAR approach in order to clarify the dynamic interrelationship between public investment and politics, intergovernmental transfer and demographic factors. The sample is a prefectural-level panel data for the period of FY 1985-2010. Granger causality tests and impulse response functions clarify positive and bidirectional causality between public investment and intergovernmental transfer or ratio of construction workers which I regard as local interest group seeking public investment. These results imply that both intergovernmental transfer and politics have played important roles deciding public investment policy in Japan. Moreover, empirical results show that higher ratio of aged 65 or above leads less public investment. This may be a sign of graying democracies in Japan.