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2015 | OriginalPaper | Buchkapitel

5. Public Policy and Economic Growth in the Integrating Japanese Economy

verfasst von : Hiroki Kondo

Erschienen in: The Political Economy of Fiscal Consolidation in Japan

Verlag: Springer Japan

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Abstract

In an economy where goods and factors markets are progressively integrating and modern industries with scale economies and externalities are prevailing, economic activities tend to concentrate in a limited number of regions. This paper considers the outcomes of fiscal competition, competition in tax and subsidies and competition in public infrastructure provision among regions in this process. There is no pure strategy Nash equilibrium. A region’s choice of capital subsidy or public infrastructure provision is not deterministic. We therefore consider a mixed strategy Nash equilibrium. Fiscal competition tends to be fiercer in this equilibrium. Concentration of economic activities causes serious and persistent income gaps among regions. As a consequence, regions are impelled make more aggressive efforts to attract modern industries within their borders. Yet the industries the regions seek to introduce will settle in only a limited number of regions. Many regions fail in introducing an industry after making tremendous investments in public infrastructure. As a consequence, huge amounts of public infrastructure remain are left unused in many regions, incurring huge welfare losses.

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Vorheriges Kapitel Fiscal Consolidation and Local Public Finances in Japan: Incentive Problems Associated with Intergovernmental Transfers and Their Political Roles

Nächstes Kapitel Tax Policy Under the “Generational Election System”

Nur mit Berechtigung zugänglich

Krugman (1991) and Kim (1995) investigated regional agglomerations of manufacturing industries in the U.S. computing the Gini coefficient of spatial inequality. Ellison and Glaeser (1997) exploited an index which can measure spatial agglomeration distinguishing it from industrial concentration due to plant level scale economies and applied it to the case of the U.S. manufacturing industry. However, the results depend on the choice of the size and shape of the spatial unit. To overcome this drawback, Duranton and Overman (2005) measured the distances between all the pairs of the plants in the same industry and observed the distribution of the distances to investigate the case of the U.K. manufacturing industry.

Holl (2004a,b) and Chandra and Thompson (2000) show that the improvements in transportation facilities cause the concentrations of economic activities.

Public infrastructures such as roads, railways, and industrial parks play a significant role in the introduction and development of modern industries. Yoshino and Nakajima (1999) examine the productivities of disaggregated public infrastructures and show that production infrastructures such as roads have significant impacts on the productivity of the secondary sector of industry. Yoshino and Nakano (1994, 1996) show that public infrastructures have higher in urban areas where modern industries are based.

Baldwin and Krugman (2004) analyze a game of sequential move and its Stackelberg equilibrium. The other studies and this work consider a game of simultaneous moves.

Baldwin et al. (2003) summarize the results in fiscal competition in the new economic geography models.

The tax rates in equilibrium differ in the basic tax competition model as well, if countries with different size are introduced. In Bucovetsky (1991) and Wilson (1991), the larger country has the lower elasticity of capital outflow and chooses higher tax rates in equilibrium. Haufler and Wooton (1999) and Ottaviano and Ypersele (2005) introduce international trade and imperfect competition, and show that a larger country sets higher capital tax rates (or lower subsidy rates) yet it can attract more firms as its larger market is more attractive to them. In contrast to these studies, Wilson (1987) analyzed the endogenous determinations of the specialization pattern and the gap in capital tax rate between ex-ante identical countries, introducing international trade and sectors that differ in the intensity of capital. The country specializing in capital-intensive goods chooses the lower capital tax rate than the country specializing in labor-intensive goods.

Note that when transaction costs fall, a firm moving from region 1 to 2 can expect less of a decrease in its profits from region 1’s larger market, as its access to the foreign market is improved. Lower transaction costs reduce the opportunity costs for a firm leaving the agglomeration region 1, and thus de-stabilize the agglomeration again. Yet a transaction cost in a medial range, such as τ ^∗ in Fig. 5.2b, is half-finished, in the following sense: for a firm moving to region 2 alone, τ ^∗ is too small to protect the domestic market in region 2 and ensure sufficiently large profits from that market, yet too large to ensure access to the larger foreign market in region 1 and sufficiently large profits from that market. That is, when τ = τ ^∗, locating in region 2 outside of the agglomeration becomes the most disadvantageous, and the agglomeration force in region 1 becomes the most prominent. When τ becomes smaller than τ ^∗, the agglomeration force becomes less prominent but remains strong enough to stabilize agglomeration.

When region i hosts the manufacturing industry, a rise in t _i increases the disposable income in the region and it in turn expands the market size. If we introduce a utility function in which demands for manufacturing goods have income effects, a change in t _i therefore affects \( {r}_i/ {r}_j \) through an additional channel. These effects are too small, however, to change the stability of agglomeration.

Fujita et al. (2001) summarize the development of theoretical frameworks in the new economic geography models, including the settings of more than two regions and continuous space.

See Akai (2014).

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Titel: Public Policy and Economic Growth in the Integrating Japanese Economy
verfasst von: Hiroki Kondo
Verlag: Springer Japan
Buch: The Political Economy of Fiscal Consolidation in Japan
Print ISBN: 978-4-431-55126-3

Electronic ISBN: 978-4-431-55127-0

Copyright-Jahr: 2015
DOI: https://doi.org/10.1007/978-4-431-55127-0_5