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Does municipal mergers internalize spatial spillover effects? Empirical evidence from Japanese municipalities

Saito, Hitoshi and Hirota, Haruaki and Yunoue, Hideo and Miyaki, Miki (2017): Does municipal mergers internalize spatial spillover effects? Empirical evidence from Japanese municipalities.

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This paper investigates whether municipal mergers could internalize spatial spillover effects by comparing mergers before and after they occur, especially focusing on local public library services in Japan. A spatial spillover effect occurs when the benefit of a local public service spreads across not only its own administrative district but also into neighboring ones. A free rider problem among municipalities might be caused when a municipality makes a policy decision regarding how much it supplies to its own local public service under a decentralization system, recognizing the existence of a spatial spillover effect. Under such circumstances, spatial spillover effects might be internalized through municipal mergers. In Japan, the boundaries of administrative districts—including those of municipalities—have been determined based on traditional or historical reasons. However, large-scale municipal mergers took place in FY2004 and FY2005 due to serious fiscal deficits and a rapidly aging population. Consequently, the number of municipalities in Japan has decreased from 3,232 to 1,820. In light of these facts, we examine whether municipal mergers internalize spatial spillover effects, focusing on Japanese local public library services, by applying cross-sectional spatial autoregressive models. As a result, we found that there are spatial spillover effects in public library services both in FY2001 (before) and in FY2008 (after). We also found that the impact of such spillovers in FY2008 is smaller than that in FY2001. The results imply that municipal mergers could at least partially internalize spatial spillover effects among municipalities.

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