Trends in the regional allocation of public investment in the post-bubble Japanese economy

Abstract

With reference to the assumptions presented by Yamano and Ohkawara (J Reg Sci 40:205–229, 2000) on the specification of a production function with region-specific individual effects on public capital, this paper introduces a new benchmark index in order to analyze the Japanese government’s investment allocation policy across subnational regions, with an emphasis on efficiency, equity, and/or redistribution under trade-off restrictions. This index, termed the equity–growth allocation share of public investment herein, is derived from a conventional Solow growth accounting approach. Specifically, it is defined as a region’s share of the periodic change in the nation’s public capital, where its growth contribution with its interregional spillover effects to overall output growth is the same across subnational regions. We apply this index to the post-bubble Japanese economy, which was beset by efficiency–equity trade-offs between Tokyo’s unipolar development and balanced growth given a prolonged recession. We find a shift from a pro-efficiency to a non-pro-efficiency allocation policy in the mid-1990s. This finding therefore rules out the inference that the government chose an inverse policy direction thereafter and instead implies that it rather attempted to balance efficiency and redistribution.