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A Political Economy Theory of the Soft Budget Constraint

A Political Economy Theory of the Soft Budget Constraint
Author: James A. Robinson
Publisher:
Total Pages: 48
Release: 2005
Genre: Budget
ISBN:
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Why do soft budget constraints exist and persist? In this paper we argue that the prevalence of soft budget constraints can be best explained by the political desirability of softness. We develop a political economy model where politicians cannot commit to policies that are not ex post optimal. We show that because of the dynamic commitment problem inherent in the soft budget constraint, politicians can in essence commit to make transfers to entrepreneurs which otherwise they would not be able to do. This encourages such entrepreneurs to vote for them. Though the soft budget constraint may induce economic inefficiency, it may be politically rational because it influences the outcomes of elections. In consequence, even when information is complete, politicians may fund bad projects which they anticipate they will have to bail out in the future.

The Place of the Soft Budget Constraint Syndrome in Economic Theory

The Place of the Soft Budget Constraint Syndrome in Economic Theory
Author: Janos Kornai
Publisher:
Total Pages: 0
Release: 2000
Genre:
ISBN:
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The concept of the budget constraint, previously applied mainly to household decisions, was extended to enterprises and other organizations initially by Kornai for socialist economies. The more general phenomenon usually includes rent seeking, although not all rent-seeking behavior is associated with a soft budget constraint (SBC). Rather, SBC analysis is a theory of exit, or more precisely, of the demise of organizations. Moreover, the syndrome cannot be treated as a special case of the theory of regulation because not all price regulation softens the budget constraint. The SBC can emerge in nonregulated spheres, especially when financial interactions take place in vertical relationships between superiors and subordinates rather than in horizontal market conditions.

Fiscal Decentralization and the Challenge of Hard Budget Constraints

Fiscal Decentralization and the Challenge of Hard Budget Constraints
Author: Jonathan Rodden
Publisher: MIT Press
Total Pages: 502
Release: 2003
Genre: Business & Economics
ISBN: 9780262182294
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A multi-country study of the conditions under which decentralized countries might ensure fiscal discipline.

Soft Budget Constraint Reconsidered

Soft Budget Constraint Reconsidered
Author: Mehrdad Vahabi
Publisher:
Total Pages: 0
Release: 2013
Genre:
ISBN:
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This paper demonstrates that Kornai's original concept of the soft budget constraint (SBC) as a theoretical innovation in micro-theory disguises income redistributions that are essentially macroeconomic relationships. The SBC also postulates a competitive market economy as the benchmark of hard budget constraint (HBC) and efficiency. A recent formal theory explains the SBC as a component of profit-maximizing strategic behaviour. From this perspective, the SBC can be integrated into the new microeconomics, but it loses its specific institutional connotation and its macroeconomic dimension. The SBC is thus included in ubiquitous market-type relationships, particularly complete (optimal) contractual arrangements.

The Socialist System

The Socialist System
Author: Janos Kornai
Publisher: Clarendon Press
Total Pages: 676
Release: 1992-05-28
Genre: Political Science
ISBN: 0191521604
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This book provides a comprehensive account of the structure, conduct, and performance of the centrally planned economies of Eastern Europe, the USSR, Communist China and the Marxist LDCs, looking at 26 nations in all. The author focuses on reform, perhaps the most important issue facing countries such as the USSR, Poland, Hungary, and China. Bureaucracy, soft budget constraints, markets, and the nature of the socialist state are the central issues that arise in the course of reforming a socialist economy. The first half of the book deals with 'classical socialism' and provides a theoretical summary of the main features of a now closed period of history. The second half deals with the processes of reform and concludes that the reform of classical socialist systems is doomed to failure as they are unable to renew themselves internally.