February 14, 2005

This conference examines tax policy and decentralization in Japan and the United States. The conference was organized by Amihai Glazer of UC Irvine and Hiroki Kondo of Shinshu University.

Welcome to the CSD
CSD Conference Room, 5206 Social Science Plaza

William Schonfeld, Director, CSD

9:15-10:45   Session I

Chair: Tomoya Ida
Papers:
"Japan's Soft Budget Problems and Local Expenditures"
Takero Doi, Keio University and Toshihiro Ihori, University of Tokyo
"Decentralized Leadership Meets Soft Budget"
Nobuo Akai, Kobe University of Commerce and Motohiro Sato, Hitotsubashi University

11:00-12:30 Session II

Chair: Satoko Maekawa
Papers:
"Migration in Search of Good Governments"
Amihai Glazer, University of California, Irvine and Hiroki Kondo, Shinshu University
"Complementarity, Fiscal Decentralization and Economic Growth"
Nobuo Akai, Kobe University of Commerce, Yukihiro Nishimura, Yokohama National University and Masayo Sakata, Osaka International University

12:30-1:30 Lunch

1:30-3:00 Session III

Chair: Martin McGuire, UC Irvine
"Prices, Capacities and Service Quality in a Congestible Bertrand Duopoly"
Bruno De Borger, University of Antwerp and Kurt Van Dender, University of California, Irvine
"Envy Minimization in the Optimal Tax Context"
Yukihiro Nishimura, Yokohama National University

3:30-5:00 Session IV

Chair: Kenneth Small, UC Irvine
"The Effect of Proposition 13 on Voter Turnout for Local Government Officials"
Seiji Fujii, University of California, Irvine
"Some Empirical Evidence on Demand System and Optimal Commodity Taxation"
Seki Asano, Tokyo Metropolitan University and Takashi Fukushima, National Graduate Institute for Policy Studies,
 
Abstracts

"Envy Minimization in the Optimal Tax Context"
Yukihiro Nishimura, Yokohama National University

This paper examines the optimal redistribution to minimize envy in the sense of Chaudhuri (1986) and Diamantaras and Thomson (1990), under the second-best tax policy. An allocation is A-equitable if no agent prefers a proportion A of any other agent's bundle. We study the allocations that maximize A among the second best Pareto efficient allocations. In the standard two-class economy with identical preferences (e.g., Stiglitz (1982)), under normality of consumption and leisure, the Diamantaras-Thomson allocation coincides with the leximin allocation. In many-agent economies, it is possible to order the class of second-best Pareto efficient allocations graded by progressivity in the sense of Hemming and Keen (1983), with respect to the intensity of envy. Envy is then minimized in the most progressive tax system.

"Complementarity, Fiscal Decentralization and Economic Growth"
Nobuo Akai, Kobe University of Commerce Yukihiro Nishimura, Yokohama National University and Masayo Sakata, Osaka International University

Theories of voluntary provision of public goods and development economics clarify that complementarity in the production process is a crucial ingredient to examine how alternative economic environments affect economic performance. This paper examines how the structure of intra- and inter-regional complementarity affects the relationship between economic growth and fiscal decentralization. We provide a theory describing how fiscal decentralization affects economic growth under various structure of regional complementarity, which illuminates a macroeconomic implication of community structure and fiscal decentralization. Our empirical analysis based on a panel data set for the fifty states of the United States over the period 1992-1997 supports our theoretical specification of the production function, and, consistent with our theoretical result applied to the estimated parameters, we observe a hump-shaped relationship between fiscal decentralization and economic growth. Our analysis also shows that optimal degree of fiscal decentralization conducive for economic growth is higher than the average of the data. and hence further decentralization is recommended for economic growth.

"Some Empirical Evidence on Demand System and Optimal Commodity Taxation"
Seki Asano, Tokyo Metropolitan University and Takashi Fukushima, National Graduate Institute for Policy Studies

We have two major tasks in this paper. The first is to obtain a reasonable estimate of the Japanese demand system, which includes leisure, income, and commodity choices. The second is to compute and evaluate the optimal tax equilibrium. We use Almost Ideal Demand System to estimate the Japanese demand system. The estimated demand system is found to be consistent with the microeconomic theory. We then evaluated the optimal commodity tax structure by calculating the equilibria under lump-sum taxation, optimal commodity taxation, and uniform commodity taxation. We found that the deadweight losses under uniform taxation are very small, and that the optimal commodity tax rates are strikingly close to uniform.

"Decentralized Leadership Meets Soft Budget"
Nobuo Akai, Kobe University of Commerce and Motohiro Sato, Hitotsubashi University
We develop the standard decentralized leadership model in which the local government moves first and the central government transfer is made ex post. First, this paper shows that ex post transfer by the central government creates moral hazard problem ex ante and the mechanism of decentralized leadership is equal to soft budget model qualitatively. Second, this paper also shows that the direction of moral hazard problem changes, depending on what type of authority is given to the local government ex ante. These main results still hold even in the extended model that allows two types of public goods, spillover effect of public goods and distortionary tax.

"Japan's Soft Budget Problems and Local Expenditures"

Takero Doi, Keio University and Toshihiro Ihori, University of Tokyo

The purpose of this paper is to analyze Japanese fiscal policy, particularly from the viewpoint of local governments' behavior during the fiscal reconstruction movement in Japan. We investigate the impact of local government behavior on public debt and explore fiscal difficulties of heavy dependency of debt finance --in particular, borrowing for Local Allocation Tax Grants rapidly increased -. The soft budget problem with borrowing of the special account for the grants is one of representative problem of Japan in the 1990s. We also address political constraints to the fiscal reconstruction movements. In order to realize successful fiscal reconstruction, the central government needs to restrain lobbying activities of local political groups.

"Prices, Capacities and Service Quality in a Congestible Bertrand Duopoly"

Bruno De Borger, University of Antwerp and Kurt Van Dender, University of California, Irvine

We study the duopolistic interaction between congestible facilities that supply perfect substitutes. Firms are assumed to make sequential decisions on capacities and prices. Since the outcomes directly affect consumers' time cost of accessing or using a facility, the capacity sharing rule is endogenous. We study this two-stage game for different firm objectives and compare the duopoly outcomes with those under monopoly and at the social optimum. Our findings include the following. First, for profit maximizing firms duopoly prices are lower than monopoly prices, but higher than in the social optimum. Second, both capacity provision and service quality, defined as the inverse of time costs of using the facility, are distorted under duopoly: they are below the socially optimal levels. This contrasts with the monopoly outcome, where pricing and capacity provision are such that the monopolist does provide the socially optimal level of service quality. Third, when firms care about output as well as profit this strongly affects the pricing game, but strategic capacity choices are not substantially affected. Fourth, the role of demand and cost parameters and of firm asymmetries for prices, capacities and service qualities are numerically illustrated.

"The Effect of Proposition 13 on Voter Turnout for Local Government Officials"
Seiji Fujii, University of California, Irvine

This paper considers how voters change their attitudes toward local government officials when they lost power to set tax policy. In particular, Proposition 13 limited the property tax rate to 1% of purchase price and shifted power from local governments to the state government. I analyze the effect of Proposition 13 on voter turnout for the county board of supervisors and school board members. I predict that voter turnout rates declined since more voters will abstain when election results matter less.

"Migration in Search of Good Governments"

Amihai Glazer, University of California, Irvine and Hiroki Kondo, Shinshu University

Some cities are large and growing; others are shrinking. Some regions see increasing concentrations of high technology industries, while other regions see their industries flee. The different features of regions can explain differences in levels, but do not directly explain growth or changes in population. Characteristics of firms or of industries may explain differential growth. In particular, economies of agglomeration, or positive network effects, can explain why some industries show regional concentration.