ABSTRACTThis 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.
SUMMARYThe 'softening' of the budget constraint appears when the strict relationship between the expenditure and the earnings of an economic unit (firm, household, etc.) has been relaxed, because excess expenditure will be paid by some other institution, typically be the paternalistic State. The higher the subjective probability that excess expenditure will be covered by external assistance, the softer the budget constraint. The main focus of the paper is on the firm. There are several ways of 'softening' the budget constraint: subsidies, tax‐exemptions, soft credits and so on. The softness weakens price responsiveness, leads to losses in efficiency and under certain conditions may generate excess demand. The paper examines the 'soft budget constraint' syndrome in Hungary, Yugoslavia, and China, i.e. in the economies pioneering in the introduction of market‐oriented decentralization reforms. Socialist economies exhibit a rather extreme degree of this phenomenon, which to a lesser degree can be observed in mixed economies as well.ZUSAMMENFASSUNGDie "Aufweichung" der Budgetrestriktionen zeigt sich, wenn der enge Zusammen‐hang zwischen den Ausgaben und Einnahmen einer Wirtschaftseinheit (Firma, Haus‐halt usw.) sich auflockert, weil die Mehrausgabe von einer anderen Institution, im typischen Falle vom paternalistischen Staat gedeckt wird. Je höher die subjektive Wahrscheinlichkeit ist, dass die Mehrausgabe durch eine aussenstehende Hilfsquelle gedeckt wird, um so weicher ist die Budgetrestriktion. Im Mittelpunkt dieser Abhand‐lung steht das Unternehmen. Es gibt mehrere Möglichkeiten zur "Aufweichung" der Budgetrestriktion: Subventionen, Steuerfreiheit, weiche Kredite usw. Die Weiche schwächt die Preissensibilität, führt zu Verlusten in der Wirksamkeit, und unter gewissen Umständen kann eine Mehrnachfrage herbeigeführt werden. Die Abhand‐lung untersucht das Phanomen der "weichen Budgetrestriktion" in Ungarn, Jugosla‐wien und China, das heisst in den Wirtschaften, die in der Einführung von marktorien‐tierten Dezentralisationsreformen bahnbrechend sind. Die sozialistischen Wirtschaften weisen einen ziemlich hohen Grad dieses Phänomens auf, das in geringerem Masse auch in gemischten Wirtschaften zu beobachten ist.RÉSUMÉL'adoucissement" de la contrainte budgétaire apparaît lors du relâchement de la stricte relation entre les dépenses et les recettes d'une unitééconomique (entreprise, ménage…). Cela survient quand l'excés de dépenses est pris en charge par une autre institution, l'exemple type en étant l'Etat‐Providence. II existe plusieurs façons "d'adoucir" la contrainte budgétaire: les subventions, les abattements fiscaux, les crédits bonifiés, etc. Cet adoucissement affaiblit la capacityé de réponse par les prix, il conduit à des pertes d'efficacité, et, dans certaines conditions, peut engendrer un excès de demande. On peut contempler le stade ultime de ce phénomène dans les économies socialistes, mais les économies mixtes en présentent certains symptômes.L'auteur examine le syndrôme de "l'adoucissement" de la contrainte budgétaire en Hongrie, en Yougoslavie et en Chine, c'est‐à‐dire dans les économies socialistes qui, les premierès, ont tenté une certaine décentralisation économique.
There is much evidence against the so-called too big to fail hypothesis in the case of bailouts to sub-national governments. We look at a model where districts of different size provide local public goods with positive spillovers. Matching grants of a central government can induce socially-efficient provision, but districts can still exploit the intervening central government by inducing direct financing. We show that the ability of a district to induce a bailout from the central government and district size are negatively correlated.
There is much evidence against the so-called "too big to fail" hypothesis in the case of bailouts to sub-national governments. We look at a model where districts of different size provide local public goods with positive spillovers. Matching grants of a central government can induce socially-efficient provision, but districts can still exploit the intervening central government by inducing direct financing. We show that the ability of a district to induce a bailout from the central government and district size are negatively correlated.
The article deals with the phenomenon of the soft budget constraint (SBC). Though originally it was formulated to illuminate economic behavior in socialist economies, this concept is increasingly acknowledged to be pertinent well beyond their realm. The authors have two main objectives: conceptual clarification and survey of formal theoretical literature on SBC. In the first part of the article the accent is made on analyzing the essence of the SBC syndrome, means of its softening and corresponding expectations of organizations. Formal models of SBC in socialist and transition economies are also analyzed.
The optimal design of credit contracts and bankruptcy procedures is an important policy question in both developed and developing economies. In this paper we deal with several theoretical considerations related to these important policy problems. The main concern of this paper is with the impact of the relaxation of bankruptcy procedures providing for the possibility of debt renegotiation instead of strictly imposing bankruptcy whenever the debtor falls into default on his or her debt. This paper contributes to the discussion on optimal bankruptcy procedures in the context of soft and hard budget constraint literature.
There is much evidence against the so-called too big to fail hypothesis in the case of bailouts to sub-national governments. We look at a model where districts of different size provide local public goods with positive spillovers. Matching grants of a central government can induce socially-efficient provision, but districts can still exploit the intervening central government by inducing direct financing. We show that the ability of a district to induce a bailout from the central government and district size are negatively correlated.
The concept of the soft budget constraint (SBC) was initially formulated by economist Janos Kornai in the context of socialist economies. I argue that the SBC can be regarded as the political economy of a predatory state in both the so-called socialist and capitalist economies. The hard budget constraint (HBC) is not related to an ideal competitive market economy but to a household level budget constraint, particularly by salaried members of the population in both types of economies.JEL codes: D20, E20, P2, P5
There is much evidence against the so-called "too big to fail" hypothesis in the case of bailouts to subnational governments. We look at a model where districts of different size provide local public goods with positive spillovers. Matching grants of a central government can induce socially-efficient provision, but districts can still exploit the intervening central government by inducing direct financing. We show that the ability and willingness of a district to induce a bailout and district size are negatively correlated. Furthermore, we argue that these policies can be equilibrium strategies.
There is much evidence against the so-called too big to fail hypothesis in the case of bailouts to subnational governments. We look at a model where districts of different size provide local public goods with positive spillovers. Matching grants of a central government can induce so-cially-efficient provision, but districts can still exploit the intervening central government by induc-ing direct financing. We show that the ability and willingness of a district to induce a bailout and district size are negatively correlated. We also discuss the effect economies of scale in local public goods provision has on the bailout policies and argue that these policies can be subgame perfect equilibrium strategies.
