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Journal of Management Control
Published in: Journal of Management Control 3-4/2018

04-09-2018 | Original Paper

Asymmetric cost behavior in local public enterprises: exploring the public interest and striving for efficiency

Author: Shohei Nagasawa

Published in: Journal of Management Control | Issue 3-4/2018

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Abstract

Asymmetric cost behavior, which was first identified in Germany in the 1920s, has attracted the attention of researchers over the last two decades. Cost management is essential not only for commercial enterprises (CEs) but also for public organizations. Therefore, in this research, I focus on local public enterprises (LPEs), one type of public organization in Japan, and clarify their cost behavior. Then, taking the perspective of institutional theory, I compare LPEs with CEs. Because LPEs are required to behave according to the restrictions of LPE law, they are more vulnerable to institutional pressure. Specifically, LPEs have two normative institutional constraints: (1) efficiency and (2) the public interest (i.e., the responsibility to support people’s everyday lives). Therefore, LPEs must provide certain services even if they are unprofitable. To explore whether normative institutional pressure causes LPEs to be cost inefficient, I compare the cost behavior of these enterprises with that of CEs in five ways. I analyze (1) panel data covering 40 years, (2) the change over time, (3) the differences by industry type, (4) the relationship with population changes, and (5) the effect of political influence. I find that LPEs’ cost management is not necessarily cost inefficient; however, their ability to adjust costs may be lost in the future due to the influence of institutional constraints. I therefore assert that LPE administrators must constantly struggle to balance the institutional constraints of the public interest and efficiency since these factors require long-term, stable management.
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Appendix
Available only for authorised users
Footnotes
1
Hereafter, in Sect. 1, “LPEs” refer to corporatized LPEs.
 
2
The concept of efficiency is used differently in each study focusing on the public sector (Voorn et al. 2017). In this article, efficiency refers to cost efficiency.
 
3
The concept of the public interest can be defined not only as a specific conceptualization of the term “public interest” but also with a variety of meanings from very specific to very broad definitions (Pesch 2005; Van Genugten 2008). Therefore, in this research, following De Bruijn et al. 2004, “public interest” is defined as both the importance of services (i.e., necessary and convenient for everyday lives) and the roles and responsibilities of governments.
 
4
LPEs in Japan adopted almost the same bookkeeping method as CEs beginning in 1966. After 2014, the accounting standards of LPEs have changed. Many of them are based mainly on changes in the balance sheet that this research does not pay attention to. On income statements (P/L) that I pay attention to in this study, the method of amortizing fixed assets when purchased with subsidies has been changed. Before 2013, the amortizing fixed assets were accounted for only in expenses; on the other hand, after 2014, the amortizing fixed assets were accounted for not only in expenses but also in revenue, as the long-term advances received.
 
5
1974 is the first year for which data collection was possible.
 
6
The depopulated areas in Japan are defined in the Act on Special Measures for Promotion for Independence for Underpopulated Areas. There are many requirements for specifying depopulated areas: one is that the population declined more than 33%.
 
7
Population data in each municipality is published as “Basic Resident Register Annual Population Report” by statistics bureau, ministry of internal affairs and communications in Japan.
 
8
LPEs’ yearbooks are edited annually by the ministry of internal affairs and communications in Japan. They include the annual financial statement of each LPE in each municipality. The financial statements include B/S, P/L, the detail information of expenses, etc.; these data are found in electronic databases after 1999.
 
9
This result was equivalent and consistent with the results using panel data analysis with the time trend dummy variable: \( \ln \left( {\frac{{\text{Cos} t_{i,t} }}{{\text{Cos} t_{i,t - 1} }}} \right) = \beta_{0} + \beta_{1} *\ln \left( {\frac{{\text{Re} venue_{i,t} }}{{\text{Re} venue_{i,t - 1} }}} \right) + \beta_{2} *Decrease\_Dummy_{i,t} *\ln \left( {\frac{{\text{Re} venue_{i,t} }}{{\text{Re} venue_{i,t - 1} }}} \right) + \beta_{3} *Timetrend + \beta_{4} *Decrease\_Dummy_{i,t} *\ln \left( {\frac{{\text{Re} venue_{i,t} }}{{\text{Re} venue_{i,t - 1} }}} \right)*Timetrend + \varepsilon_{i,t} \).
 
10
Repair costs (including replacement costs) increased by a factor of 7.6 times from 1974 to 2013.
 
11
According to the LPEs’ yearbook in 2013, labor cost ratios are as follows: residential water supply is 32.7%, industrial water supply is 39.6%, sewerage is 44.0%, transportation is 25.7%, electric power is 26.2%, gas power is 13.0%, and hospitals are 6.5%.
 
12
According to the LPEs’ yearbook in 2013, depreciation cost ratios are as follows: residential water supply is 12.5%, industrial water supply is 11.9%, sewerage is 6.4%, transportation is 33.3%, electric power is 25.1%, gas power is 8.5%, and hospitals are 46.5%.
 
13
According to the LPEs’ yearbook in 2013, the market share ratios are as follows: residential water supply is 99.5%, industrial water supply is 99.9%, sewerage is 91.3%, transportation (railway) is 13.4%, electric power is 1.0%, gas power is 2.3%, and hospitals are 12.3%.
 
14
Refer to footnote 13.
 
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Metadata
Title
Asymmetric cost behavior in local public enterprises: exploring the public interest and striving for efficiency
Author
Shohei Nagasawa
Publication date
04-09-2018
Publisher
Springer Berlin Heidelberg
Published in
Journal of Management Control / Issue 3-4/2018
Print ISSN: 2191-4761
Electronic ISSN: 2191-477X
DOI
https://doi.org/10.1007/s00187-018-0269-x

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