Association for Public Policy Analysis & Management

Some municipalities grow, while others decline. When municipalities involve disastrous conflicts or degrade service quality, residents might move away, speeding the cycle of decline. Drawing on Albert Hirschman’s (1970) Exit, Voice, and Loyalty (EVL) framework, this study is aimed at revealing citizens’ response mechanism to municipal decline caused by municipal government failure.

Recent EVL studies on local governance have examined whether citizens in general are more likely to exit or to voice complaints in response to dissatisfaction with municipal goods and services. Few studies, however, have tested EVL under the specific circumstances of municipal decline. Examining the case of the Japanese town of Ohwani under fiscal crisis, the study identifies the effects of fiscal reform, including the impacts of tax increases, service cuts, and political conflicts, on citizens’ exit intention, voice activities, and perceptions of municipal management.

The Japanese alert system for local governments in fiscal crisis offers a highly suitable setting to measure the impact of fiscal reconstruction. Under this legislation, the central government sets national criteria for fiscal soundness and mandates that local governments which fall short of these criteria design and implement a fiscal reform plan under the supervision of a central agency.

Given this exogenous fiscal reform mandate, the identification strategy of this study makes central use of this experimental framework that contrasts Ohwani under fiscal reform to a control village not under fiscal reform, Inakadate which shares similar sociodemographic features. In the first phase of study, qualitative interviews of 14 Ohwani residents were conducted to develop quantitative measures of EVL concepts under the specific circumstance of municipal decline. The estimation approach in the second quantitative phase was a unique difference-in-difference (DID) design with a time difference enabled by a careful retrospective measurement. To evoke personal recall, a survey questionnaire was designed to take two-step process from the present to the past and to use mayoral elections as a benchmark to elicit memories of past municipal management. Data were collected from 600 randomly sampled citizens of Ohwani and Inakadate, with a response rate of 44%. The findings show that the fiscal reconstruction had significant effects on exit but not on voice. In addition, dissatisfaction with service quality did not increase due to service cuts or tax increases under fiscal reform, but distrust in the policy process significantly increased.