Effects of Compact City on Local Public Finance in Japan: Estimation of Urban Sprawl Elasticity of Public Costs with Respect to Each municipality

Abstract

　This paper aims to explore the Japanese municipalities where urban sprawl is expected to deteriorate their financial conditions in a society characterized by decreasing and aging population. First, we estimate the local expenditure function using the cross-sectional data of 1,085 Japanese municipalities in 2008. The function is then theoretically derived by combining the supply and demand functions for local public services. Second, we employ the empirical results obtained to calculate the urban sprawl elasticity. The elasticity shows the percentage local marginal public costs run up by a 1% expansion in urban sprawl. The elasticity is estimated to range from -0.207 to 0.299. Third, we implement a cluster analysis to identify the municipalities where urban sprawl would lead to financial shortage in the future. We implement it for urban sprawl elasticity, financial capability indicator, ratio of children in the population, and ratio of elderly people in the population. Consequently, the municipalities of our concern would not only include numerous small local cities with weaker financial capability, but also some metropolises which we ever regarded as economically healthy cities. Whether compact city policy is essential for municipalities would depend on regional circumstances, regardless of administrative divisions.