KEIO/KYOTO JOINT GLOBAL CENTER OF EXCELLENCE PROGRAM Raising Market Quality-Integrated Design of “Market Infrastructure” KEIO/KYOTO GLOBAL COE DISCUSSION PAPER SERIES

This paper investigates poverty traps with the Local Allocation Tax (LAT) grants in Japan. The LAT grants, which distributed to local governments by the central government, may be hesitated to make efforts for enhancing regional economic growth, due to the calculation of the LAT grants. We show that the LAT grants give a disincentive to increase their estimated tax revenue and lower regional income by a simple dynamic model. Based on implication of our model, the panel Granger (non-)causality tests are implemented. We find that there are poverty traps due to the LAT grants