The Economic Effect of Information Technology in Japanese Local Governments

Abstract

In order to reduce fiscal expenditure, local governments attempt to implement policies, such as personnel reduction, private consignment of public services and so on. The introduction of information technology is also one of the policies related to cost reduction. However, we believe that due to the current fiscal crisis faced by many local governments, the implementation of information technology investment policy could contribute to a further financial burden because information technology investment is costly. Therefore, we think we should examine whether or not information technology investment within local governments is necessary and to what extent. In this paper, we investigate whether or not information technology contributes to cost efficiency in municipal governments in Kinki area, using the stochastic cost frontier analysis. The hypotheses that we test are whether or not, the use of information technology equipment (e.g. computer, software, telecommunication equipment) and outsourcing of information technology operations by local governments result in greater cost efficiency. The results show that the increased use of information technology equipment contributes to cost efficiency, however, outsourcing of information technology operations does not.JEL classification: H11, H72