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<p>This study examines municipal fiscal reconstruction after bankruptcy and the ex post consequences of bailout policies within a higher-level government intervention framework. When municipalities in Japan fall below fiscal rule criteria, the central government implements either the “under control” (bailout) approach or requires the “self-reconstruction” (non-bailout) approach. We compare these approaches among municipalities with similar deficit levels. Using the synthetic control method, the analysis reveals two heterogeneous effects between bailout and non-bailout policies. The findings show that the self-reconstruction approach achieves faster fiscal deficit reduction through significant expenditure cuts and decreased reliance on intergovernmental transfers and bonds. In contrast, while the under control approach improves fiscal conditions more slowly, it results in social welfare losses, including higher out-migration, establishment decline, increased crime, and lower land prices. Bailout policies have broader economic consequences beyond fiscal reconstruction and could contribute to policy-induced migration, reflecting mobility responses triggered by interventions. Our results suggest that non-bailout policies could be more advantageous for achieving fiscal reconstruction without the associated social welfare losses. The findings offer significant implications for researchers analyzing higher-level government interventions, including fiscal rules. They also provide important insights for policymakers designing fiscal reconstruction plans. Specifically, it is crucial to carefully consider the ex post consequences of different approaches to municipal bankruptcy.</p>

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Under control versus self-reconstruction after fiscal bankruptcy in municipalities

  • 期刊论文

  • 发表日期：

    2025年4月17日

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  • Haruaki Hirota,
  • Hideo Yunoue

摘要

This study examines municipal fiscal reconstruction after bankruptcy and the ex post consequences of bailout policies within a higher-level government intervention framework. When municipalities in Japan fall below fiscal rule criteria, the central government implements either the “under control” (bailout) approach or requires the “self-reconstruction” (non-bailout) approach. We compare these approaches among municipalities with similar deficit levels. Using the synthetic control method, the analysis reveals two heterogeneous effects between bailout and non-bailout policies. The findings show that the self-reconstruction approach achieves faster fiscal deficit reduction through significant expenditure cuts and decreased reliance on intergovernmental transfers and bonds. In contrast, while the under control approach improves fiscal conditions more slowly, it results in social welfare losses, including higher out-migration, establishment decline, increased crime, and lower land prices. Bailout policies have broader economic consequences beyond fiscal reconstruction and could contribute to policy-induced migration, reflecting mobility responses triggered by interventions. Our results suggest that non-bailout policies could be more advantageous for achieving fiscal reconstruction without the associated social welfare losses. The findings offer significant implications for researchers analyzing higher-level government interventions, including fiscal rules. They also provide important insights for policymakers designing fiscal reconstruction plans. Specifically, it is crucial to carefully consider the ex post consequences of different approaches to municipal bankruptcy.