Citation

Liston-Heyes C. Def. Peace Econ. 1995; 6(4): 289-294.

Copyright

(Copyright © 1995, Informa - Taylor and Francis Group)

DOI

10.1080/10430719508404832

PMID

unavailable

Abstract

Governments value the survival of the industrial defence base per se, quite apart from the value of the defence goods it currently produces. Procurement policies are myopic, however, in that they do not explicityly take into account the loss the government experiences when one of its defence firms is bankrupted. As a result, governments resort to bailouts to prevent bankrupticies, and firms are implicityly encouraged to accept contracts which are unlikely to satisfy established procurement guidelines. While such bailouts may or may not be in the general interest, they are likely to create additional social losses when they are done 'covertly'. The supposition that the government is confined to use a procurement process that disregards the intrinsic value of defence firms justifies the introduction of an 'optimal bailout policy'. The framework used to develop such a policy borrows concepts from environmental economics, particularly those relating to the preservation of irreplaceable resources and irreversibilities of investments.