Impact of the Accumulation Rule of Fiscal Slack and Mimicking Behavior on Local Public Finance

Given the reluctance in the extant fiscal literature to apply the intergovernmental competition concept to fiscal slack, this study empirically analyzes how local governments’ fund holdings are determined, focusing on interactions among local governments. It constructs a panel dataset of all municipalities in Japan and employs spatial econometrics to examine whether municipalities refer to the holdings of other organizations when making decisions regarding the fund holding size. Accordingly, for municipalities with their own rules regarding the size of their fund holdings, fund balances of neighboring areas positively affect the increase or decrease in the municipalities’ fund balance. Furthermore, for municipalities affected by other organizations, the larger the balances in neighboring areas, the lower the future burden ratio. Therefore, the study’s findings suggest a mimicking behavior mechanism of municipalities, where they formulate funding rules related to information on other organizations’ fund balances, and their funding behavior based on such rules induces changes in their fund balances