Estimation of the Production Function of Government Enterprises in Japan

Abstract

This paper investigates the production structure of local government enterprises in Japan. Government enterprises in Japan are now facing streams of deregulation and privatization, as are public utilities. It is useful to analyze the production and cost structures of government enterprises. Japanese local government enterprises own various kinds of businesses: water supply to residents and industries, mass transportation, subways, electricity, gas, drainage system, housing-lot supply, port maintenance and hospitals. Previous research has examined water supply, subway systems, bus transportation and hospital services, looking at each service, individually. However, prefectural government enterprises are usually administered by a single head manager, even though they belong to the different special accounts. We consider government enterprises in every prefecture not as an ensemble of many firms but as one unified firm administered by a single head manager. We estimated a static Cobb-Douglas production function and a dynamic factor demand model, of forty prefectural governments in Japan from 2001 to 2005. A dynamic factor demand model is an application of dynamic programming model developed by Pindyck and Rotemberg[15](1983). The data is 5 years×40 prefectures panel structure. The results are: 1) Japanese local government enterprises have only constant returns to scale. 2) The gross investment ratio is bigger than the gross depreciation ratio. 3) The result of the static model is slightly different from that of the dynamic model in estimates and elasticities.JEL Classification: C33, C61, D21, D24