Fiscal Consolidation and Local Public Finances in Japan: Incentive Problems Associated with Intergovernmental Transfers and Their Political Roles

Abstract

Japanese local public finances are supported by large intergovernmental transfers from the central government. Intergovernmental transfers have two roles. The first is to guarantee fiscal standards at local levels. The second is to reduce the degree of fiscal inequality among local governments. However, both roles induce incentive problems. This chapter focuses on the incentive problems associated with intergovernmental transfers in Japan and explores how the behavior of politicians in terms of designing the transfer system affects this problem.