Capitalization Local Public Services and Public Infrastructures: A Test for the Efficient Level of Regional Public Capital(in Japanese)

The migration equilibrium model allows us to employ information on land rents to evaluate the effects of local fiscal variables. Several studies apply the model by Robach (1982), which measures the value of amenities, to the case of public capital, assuming that public capital does not affect the expenditure side of local public finance. Given this assumption, what are capitalized into land rents are the gross benefits of public capital, which the previous studies have in fact measured. However, we claim in this paper that public capital does affect local public finance. If public capital affects the expenditure side of public service production, as we show in this paper, its net, not gross, benefits are capitalized into land rents. As such, to the extent our claim captures the working of local public finance, the previous studies may have misinterpreted their empirical results. Our analysis also shows that we can validly employ the method by Brueckner (1982), originally designed for the level of public services, to examine whether or not the level of public capital is optimal, and if not, over-provided or under-provided. We then apply the analysis to the four types of infrastructure using a panel of Japanese regional data.