Joint Discussion Paper Series in Economics 40-2013
Amalgamation offers municipalities an incentive to free ride when they can subrogate the load to a new municipality after amalgamation. Previous literature has clarified opportunistic behavior in local public bond issues. However, if the municipality does not have a leeway in policy decision making, it cannot adopt free-ride behavior. Although the Japanese long-term care insurance system has been so designed that the municipality does not have discretion in its working, doubts have been raised on this score. This study empirically considers this issue by examining municipality behavior before amalgamation. Difference-in-difference regression confirms a free-ride effect in the eligibility assessments for long-term care by the Japanese municipality. These results mean that the Japanese long-term care insurance system is not managed in accordance with the institutional design.