Panel Data Analysis on Modified Calculation of Local Allocation Tax and Cost Inefficiency of Municipalities after Amalgamation

Abstract

  This study examines the determinants of the cost inefficiency of amalgamated municipal governments in Japan. We estimate the impact of the intergovernmental grant (Modified Calculation of Local Allocation Tax：MCLAT) on the cost efficiency for amalgamated municipalities from 2006 to 2012 by employing a stochastic frontier analysis. The Municipal Amalgamation Law in 1999 provided a wide variety of exceptional measures to promote the amalgamation of municipalities. For example, it allowed amalgamated municipalities MCLAT for 15 years after amalgamation. Our main findings indicate that MCLAT has a positive impact on the cost inefficiency of amalgamated municipalities and the average cost inefficiency has not decreased just before the deadline of MCLAT support by central government.