Free-Rider Behavior and Amalgamation Patterns

Abstract

The analysis described in this chapter confirms that pre-merger municipalities in Japan engage in free-rider behavior. Municipalities have an incentive to issue public debt before amalgamation because they can benefit from local public projects ahead of a merger and can subrogate the debt burden to the newly created post-merger municipality. Previous studies of this behavior applied the difference-in-differences method to samples of pre-merger and never-merged municipalities. These studies considered this method’s assumption of parallel local public debt accumulation trends for the pre-merger and never-merged municipalities, but doubt regarding the assumption that the merged municipalities are chosen at random remains, particularly in the voluntary amalgamation case. Thus, in this study, I use Heckman’s sample selection estimate to deal with the sample selection problem. Moreover, I choose an additional index for the free-rider incentives of pre-merger municipalities. Finally, I classify pre-merger municipalities as either cities or towns and villages. The results confirm that only pre-merger towns and villages with incentives to free ride engage in free riding.