Fiscal Externality, Rent Sharing and Equalisation Transfers in Japan

This article describes a quantitative analysis of Japanese equalisation transfers based on the fiscal externality models of Hartwick, Boadway and Flatters. In particular, it examines whether the actual level of equalisation transfers matches the theoretically optimal level from the efficiency point of view. Although the purpose of interregional fiscal transfer is not necessarily in the pursuit of an efficient allocation of resources, equalisation transfer surely affects it. It is often said in Japan that the equalisation transfer may distort efficiency too much and that it is one of the causes of serious fiscal conflict between the metropolitan area and local (rural) prefectures. The quantitative results show that the actual amount of transfers from resource-rich to resource-poor prefectures was below the optimal level in the 1980s. However, the resource-poor prefectures have received an excessive transfer after 1990. Specifically, the direction of the optimal transfer might change in the second half of the 1990s. The estimates for 1997 show that, at most, 1445 billion yen net should be transferred to relatively high-tax and resource-rich prefectures.