To the readers of Public Choice Studies:
Elinor Ostrom
As a scholar who has been associated with Public Choice since the very early days it is very exciting for me to learn about your plans and activities for a Public Choice Studies group in Japan. Congratulations. I think you will find that there are some deep foundations for modern thinking in this tradition that does not narrowly focus on one discipline along. In my dissertation research in the 1960's I was strongly influenced by the work of James Buchanan and Gordon Tullock in the early years and then the wonderful group of scholars that has brought this tradition to the forefront of the academic world in the half century of their contributions. It is good that you are making a private choice to include public choice in your intellectual portfolio.

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In Japan, most of public expenditures are spent through local governments. As such, the central government has to “mobilize" local expenditures when it takes stimulus economicpolicy. When stimulus economic measures areplanned, they constitute parts of the annual estimate of aggregate local expenditures which the Ministry of Internal Affairs and Communications (MIC) projects in the Local PublicFinance Program (LPFP). The LPFP annually frames the aggregate size of local expenditures.It is often claimed to be important for the MIC to keep the discrepancies between the estimated local expenditures and actual expenditures minimal so that it could maintain the legitimacy of the LPFP. A popular view is therefore that, when stimulus packages are includedin the LPFP, the MIC might make every effort to make local governments spend as much as they are planned in the LPFP. In Japan, central ministries, notably the Ministry of Finance(MOF) and the MIC, temporarily transfer their personnel to the key budgeting positions in a majority of prefectural governments. Our conjecture is therefore that prefectures where budgeting directors are temporarily transferred from the MIC tend to be more lenient on spending funds related to the stimulus packages. We empirically investigate this conjecture using a panel of 47 prefectures. Our result shows that, in contrast to our anticipation, prefectures with budgeting directors transferred from the MIC do no spend more than prefectures with their own directors, although prefectures where their budgeting directors are temporarily transferred from the MOF tend to spend less.

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This paper examines vertical externalities toward non-government sectors both theoretically and empirically. The vertical externality defined in this paper is as follows. When the government puts additional subsidies on medical care, patient copays would be minimized and demand would increase. As a result medical expenses are expected to increase. Even though these are government subsidies, a portion of this change in medical expense is transferred to respective insurers. The fact that lower level governments decide on this issue without recognizing this additional cost to third parties implies that these subsidies generate negative externalities. It also implies the existence of some negative aspects of the governmental decentralization which has been actively undertaken recently.
The empirical study conducted for this paper uses the government data of medical fee per child aged three and below, both by year and area respectively. Three different factors were focused on for the subsidies examined. Payment system, income restriction, and the age of the applying child are all taken into account for calculation. The result shows that there is a significant change in cost as subsidies are implemented, indicating the existence of a vertical externality.
In addition, payment system has a significant role in the increase of medical cost when implementing subsidies. Data shows that offering medical subsidies would increase the medical demand of applying children, if subsidies were offered through the inkind benefits.

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