Intergovernmental competition for donations: The case of the Furusato Nozei program in Japan

Abstract This paper shows that municipalities compete excessively for donations under a unique program called Furusato Nozei (Tax payment to hometown) in Japan. Under the program, people make donations to their favorite municipalities and municipalities that have received donations give reciprocal gifts in return. This causes governments to compete for donations by setting “return rates” —the value of a gift as a percentage of the donation received. Our estimates show that, in the most likely case, this competition reduces net revenue by at least 7.5% compared to when the municipalities do not compete for donations.