Incentives and hesitation: a decision theoretic analysis of the consolidation of Japanese municipalities

Recently, faced with the huge fiscal deficit, the Japanese government is committed to municipal consolidation strategies for reducing the number of municipalities in order to rationalize local administrative costs that constitute 20% of the national budget. Municipal consolidation has been strongly encouraged by the exemption law on municipality consolidation. Under the obvious fiscal incentive provided by this law, over 70% of all Japanese municipalities had rushed to set up consolidation councils that are mandatory for final consolidation permission by the government. While expiry of the law is close at hand, however, few municipalities have made a final consolidation decision, far less than the target of the Japanese government. This study tries to clarify the decision structure of this curious ´wait and see´ behavior of many municipalities despite the obvious fiscal advantage. Possible alternatives to encourage effective consolidation are suggested.