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Theories of Soft Budget Constraints and the Analysis of Banking Crises

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  • Janet Mitchell

Abstract

This paper proposes a new taxonomy for classifying models of soft budget constraints which allows identification of two classes of models. Distinguishing between these classes of models is useful, as they yield SBCs in differing circumstances and have differing theoretical and policy implications. The taxonomy is used to motivate an area of economic theory in which SBC models can yield novel insights: the analysis of banking crises. A model is presented in which SBCs arising from creditor passivity have implications for the question of the appropriate policy for dealing with bad debts on troubled banks' balance sheets. The paper also compares the implications of the two classes of SBC models for the analysis of banking crises.

Suggested Citation

  • Janet Mitchell, 2000. "Theories of Soft Budget Constraints and the Analysis of Banking Crises," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 8(1), pages 59-100, March.
    • Handle: RePEc:bla:etrans:v:8:y:2000:i:1:p:59-100
    DOI: 10.1111/1468-0351.00036
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    Cited by:

    1. Kornai, János & Maskin, Eric & Roland, Gérard, 2022. "A puha költségvetési korlát - I [The soft budget constraint I]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(1), pages 75-93.
    2. Everaert, Greetje M.M., 2004. "The political economy of restructuring and subsidisation : an international perspective," BOFIT Discussion Papers 12/2004, Bank of Finland, Institute for Economies in Transition.
    3. Nataliya Zinych & Martin Odening, 2009. "Capital market imperfections in economic transition: empirical evidence from Ukrainian agriculture," Agricultural Economics, International Association of Agricultural Economists, vol. 40(6), pages 677-689, November.
    4. Frensch, Richard, 2004. "Public governance as the source of quality and variety gains from transition," Journal of Comparative Economics, Elsevier, vol. 32(3), pages 388-408, September.
    5. Jäger, Jannik & Grigoriadis, Theocharis, 2016. "Soft budget constraints, European Central Banking and the financial crisis," Discussion Papers 2016/7, Free University Berlin, School of Business & Economics.
    6. Everaert, Greetje M.M., 2004. "The political economy of restructuring and subsidisation: an international perspective," BOFIT Discussion Papers 12/2004, Bank of Finland Institute for Emerging Economies (BOFIT).
    7. Huang, Weiting, 2007. "预算软约束与高等学校财务困境 [Soft Budget Constraints and Higher Education Sector Financial Distress]," MPRA Paper 11501, University Library of Munich, Germany.
    8. Niinimaki, J.-P., 2007. "Evergreening in banking," Journal of Financial Stability, Elsevier, vol. 3(4), pages 368-393, December.
    9. Alexei Deviatov & Barry W. Ickes, 2005. "Reputation and the Soft-Budget Constraint," Working Papers w0078, Center for Economic and Financial Research (CEFIR).
    10. Changlin Luo, 2014. "Questioning the Soft Budget Constraint," Annals of Economics and Finance, Society for AEF, vol. 15(1), pages 403-412, May.
    11. Greetje Everaert, 2003. "The Political Economy of Restructuring and Subsidisation: An International Perspective," LICOS Discussion Papers 13003, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
    12. Nan-Kuang Chen & Hsiao-Lei Chu, 2003. "Collateral Value and Forbearance Lending," CEP Discussion Papers dp0603, Centre for Economic Performance, LSE.
    13. repec:zbw:bofitp:2004_012 is not listed on IDEAS
    14. Xiaohan Guo & Jianliang Ye & Wunhong Su & Deming Luo & Xiangrong Jin, 2022. "Do zombie firms crowd out healthy firms and slow their growth? Evidence from China," Development Policy Review, Overseas Development Institute, vol. 40(6), November.
    15. Beteto, Danilo Lopomo, 2012. "Government Intervention and Financial Fragility," Risk and Sustainable Management Group Working Papers 156477, University of Queensland, School of Economics.
    16. Alexeev, Michael & Kim, Sunghwan, 2008. "The Korean financial crisis and the soft budget constraint," Journal of Economic Behavior & Organization, Elsevier, vol. 68(1), pages 178-193, October.
    17. Adam, Edmund, 2020. "‘Governments base performance-based funding on global rankings indicators’: A global trend in higher education finance or a global rankings literature fiction? A comparative analysis of four performan," International Journal of Educational Development, Elsevier, vol. 76(C).
    18. Akhmedov Akhmed & Orlov Evgeniy, 2004. "Can Government Paternalism Prevent Credit Market Failure?," EERC Working Paper Series 04-02e, EERC Research Network, Russia and CIS.
    19. J. Kornai & E. Maskin & G. Roland, 2004. "Understanding the Soft Budget Constraint," Voprosy Ekonomiki, NP Voprosy Ekonomiki, issue 11.

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