In a simplified version of the <link rid="b6">Stiglitz and Weiss (1981)</link> model of the credit market we characterize optimal policies to correct market failures. Widely applied policies, notably interest-rate subsidies and investment subsidies, are compared to the theoretical optimum. Copyright © 2009 Wiley...

It is by now well known that in an economy with increasing returns, first-best efficiency may be impossible to attain through an equilibrium concept based on market prices, even if firms are regulated to follow marginal cost pricing. We examine the efficiency issue in a special but important...