The Hiroshima Economic Review Volume 31 Issue 1
2007-08-31 発行

Internalizing Technological Externality under Default Risk

In this short article, we investigate the effects of public policies on the market equilibrium resource allocation in an economy that is affected by two sources of market failure; (i) positive technological externalities, and (ii) indebted firms' incentive to default. The Priority Production System employed by the Japanese government during the reconstruction period after World War II could achieve the first-best outcome in such an environment.