This study investigates what causes governments to use creative accounting. It is difficult to grasp the mechanism of creative accounting and show its existence. This is because, although creative accounting seemingly has close ties with increase in debt, whether creative accounting is a cause or result of the debt increase is ambiguous and finding the occurrence of creative accounting is not easy. However, by focusing on municipal mergers in Japan in the 2000s, we clarify that the incentive to increase debt causes the use of creative accounting and show the existence of creative accounting, theoretically and empirically. Our theoretical model shows that a government with a stronger incentive to increase debt rationally employs creative accounting more fiercely and that an improvement in fiscal transparency reduces both the use of creative accounting and the deficit amount. Corresponding to this finding, by using a difference-in-difference analysis and data on Japanese municipal mergers, we show that municipalities with a stronger incentive to increase debt tend to employ creative accounting.

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