THE ECONOMICS OF ILLUSION*

When individuals choose not only goods, but also how to process information, there is a bias: people tend to process information so that they feel good about themselves. This bias is particularly important in voting behavior, where agents have almost no individual effect on public choice outcomes, and therefore almost no incentive for unbiased use of information. Two examples are given. In one example, an adaptation of the classic overdepletion problem, the public chooses not to counteract externalities by appropriate tax policy. In the second example public policy follows the choices of experts, contrary to the interest of the public.     

ECONOMICS OF THE LIVING DEAD*

Zombie firms are those firms that are insolvent and have little hope of recovery but avoid failure thanks to support from their banks. This paper identifies zombie firms in Japan, and compares the characteristics of zombies to other firms. Zombie firms are found to be less profitable, more indebted, more dependent on their main banks, more likely to be found in non‐manufacturing industries and more often located outside large metropolitan areas. Overall, larger size makes the firm less likely to be a zombie, but among small firms, relatively larger firms are more likely to be protected and become zombies. Controlling for profitability, the exit probability for zombie firms does not differ from that for non‐zombies. Zombie firms tend to increase employment by more (but do not reduce employment by more) than non‐zombies. Finally, when the proportion of zombie firms in an industry increases, job creation declines and job destruction increases, and the effects are stronger for non‐zombies.     

THE FOUNDATION OF MARKET QUALITY ECONOMICS*

This study is based on my observation that high quality markets are indispensable for the healthy growth of a modern economy. Many problems surrounding markets are attributable to the lack of high quality markets. An industrial revolution creates extremely vibrant but unhealthy markets. This study introduces a concept of fairness in dealing and pricing (competitive fairness), which differs from efficiency, and defines market quality as a measure for the efficiency of allocation and the fairness of dealing and pricing. This study shows that competitive fairness is achieved by several market mechanisms that I constructed in my previous work.     

WELFARE ECONOMICS AND THE MEASUREMENT OF NNP*

Some relationships between NNP and economic welfare are explored in the confines of a simple, static welfare maximization model. Various assumptions concerning both the measurement of NNP and the economic system underlying this model are dropped seriatem and the implications for the correspondence between NNP and economic welfare are examined. The following conclusions emerge. There are several classes of resource reorganization in which NNP and welfare move in the same direction, so that NNP can serve as an ordinal proxy for welfare. These include changes in taxes or competitive imperfections which result in product substitution and movements along the transformation function. With a general qualification, NNP-welfare correspondence is preserved for allocative changes which affect the real costs and prices of goods included in NNP or of non-included goods in inelastic demand; changes in involuntary unemployment; and changes in technological externalities affecting producers. There are other cases where changes in NNP and welfare are not positively correlated. Included here are changes in real costs of non-included goods for which demand is elastic and changes in technological externalities imposed on consumers.