Consolidation of municipalities causes Pareto improvement since there exist scale economies in running of municipalities. In the author's simulation model, the central government designs a rule of allocating subsides to municipalities, and municipalities decide whether to consolidate to maximize their net annual income under the rule. The authors measure a degree of improvement sum of annual expenditure in two cases, where all municipalities consolidate which can reduce their costs by consolidation, where municipalities decide whether consolidate or not. Next, by simulating a few reformed local tax-allocation systems, the authors discuss what kind of system is efficient from the viewpoint of cost-cutting of municipalities.
