UC Santa Cruz

This dissertation consists of three papers on local government finance and labor economics, such as the impacts of intergovernmental fiscal transfer, information provision about the future extinction of municipalities, and raising the eligibility age of public pensions. My work investigates how individuals, municipalities, and housing markets respond to incentives created by policies and provides empirical evidence about these issues.

The first chapter studies the impacts of intergovernmental fiscal transfer on local public finance. I use a fuzzy regression kink design (RKD) and dynamic RKD to estimate the causal effect of Japan’s unconditional intergovernmental grants on municipal fiscal spending, employment, and revenue. In Japan, the central government provides unconditional grants to municipalities based on a mechanical formula. As a result, I observe a significant positive kink in municipal spending and employment, especially in the general administration department. I also apply dynamic RKD and identify the statistically significant positive direct effect of the current unconditional grants on municipal spending and employment, separated from indirect effects via subsequent grant decisions. Since revenue results show a decline in tax rates and collection, I find that the impact of both crowding-in and crowding-out exists and that the crowding-in effect is more prominent. Thus, I provide new evidence of the impact of unconditional grants on local public finances.

The second chapter investigates the effect of a shrinking population on local government and housing markets. I use a unique event—the publication of a list of municipalities at risk of extinction by 2040 in Japan—to estimate the impacts of declining populations on municipalities and housing markets using difference-in-differences (DID) models. Many countries are facing the crisis of population decline, and the effect of this trend on economic growth and inter- and intra-generational inequalities is a significant issue. However, it is difficult to estimate the causal impact of population decline because it proceeds steadily, so it is not a shock, and endogenous to each situation. The information shock from the list publication conveys the significance of the population decline in specific areas; I can identify the causal effects of population decline. The results show that designating future “extinction” had the effect of an increase in regional revitalization and child-oriented spending and a decrease in home prices.

The third chapter evaluates the causal effects of public pension reform on the employment and time allocation of older people. Many countries are facing an aging population, and this trend is expected to accelerate in the future. Therefore, the sustainability of social security systems, including pensions, has become a serious common issue among policymakers. In Japan, the Pension Law was amended in 1994 to raise the eligibility age in order to reduce fiscal expenditures on social security. I use a sharp RDD to estimate the impact of the 2001 reform raising the male eligibility age from 60 to 61, with the month of birth as the running variable, and April 1941 as the cutoff for raising the eligibility age. I estimate the comprehensive impact on the lifestyle of the elderly, in addition to the employment rate. The results present that the pension reform increases employment rates and work hours, but has the effect of decreasing men’s housework, leisure for relaxation, and social activities at the same time. I provide new evidence on the impact of social security reform, which is an important issue in many countries facing aging populations.