STRATEGIC INTERACTION ON LOCAL SPENDING: EVIDENCE FROM JAPANESE MUNICIPALITIES

Abstract

On March 11, 2011, the Great East Japan Earthquake struck the North-eastern part of Japan, triggered a series of disasters, destructed the Japanese economy, and caused extensive damage to infrastructures and supply chain. In a national effort to mobilize all efforts towards the recovery plan, the central government requested all municipalities to reduce their local expenditures. This study empirically examines whether municipal decisions on total expenditures are interdependent, by employing a spatial econometric approach on a sample of 363 municipalities that were severely affected by the disaster. The spatial autoregressive model with spatial error correlation was chosen through valid tests, and was estimated by generalized spatial two-stage least squares estimator. The results indicate evidence of such strategic interaction among neighboring municipalities. The robustness check tests using maximum likelihood estimation also show comparable results. It is suggested that the Japanese municipalities in the study sample may consider their neighbors’ choices in making local expenditure decisions.