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<p>Funds as fiscal slack are valuable strategic tools for municipalities to achieve budget balance, yet they remain underexplored. Recent studies emphasize the importance of accounting for spatial effects when analyzing local fiscal slack. Accordingly, this study empirically examines the determinants of municipal fund holdings, with a focus on mimicking behavior—that is, municipalities’ fiscal reactions to peers’ fund balances. It constructs a panel dataset covering all municipalities in Japan and applies spatial econometric techniques, most notably spatial instrumental variables estimation, to assess whether municipalities refer to other municipalities’ fund holdings when adjusting their own funds. Using a survey conducted by the Ministry of Internal Affairs and Communications, this study identifies municipalities that have implemented fund accumulation rules. The main finding is a counter-directional fiscal reaction among municipalities with accumulation rules: when neighboring municipalities increase their fund balances, rule-based municipalities reduce their own fund accumulation. This pattern is consistent with a yardstick competition interpretation, whereby rule-based benchmarks shape voters’ evaluations and incumbents’ incentives.</p>

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Accumulation rule of fiscal slack and mimicking behavior in local public finance: evidence from Japan’s municipalities

  • 期刊论文

  • 发表日期：

    2026年6月19日

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  • Izuru Maeda,
  • Takahiro Tsukamoto

摘要

Funds as fiscal slack are valuable strategic tools for municipalities to achieve budget balance, yet they remain underexplored. Recent studies emphasize the importance of accounting for spatial effects when analyzing local fiscal slack. Accordingly, this study empirically examines the determinants of municipal fund holdings, with a focus on mimicking behavior—that is, municipalities’ fiscal reactions to peers’ fund balances. It constructs a panel dataset covering all municipalities in Japan and applies spatial econometric techniques, most notably spatial instrumental variables estimation, to assess whether municipalities refer to other municipalities’ fund holdings when adjusting their own funds. Using a survey conducted by the Ministry of Internal Affairs and Communications, this study identifies municipalities that have implemented fund accumulation rules. The main finding is a counter-directional fiscal reaction among municipalities with accumulation rules: when neighboring municipalities increase their fund balances, rule-based municipalities reduce their own fund accumulation. This pattern is consistent with a yardstick competition interpretation, whereby rule-based benchmarks shape voters’ evaluations and incumbents’ incentives.