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Questioning the Soft Budget Constraint

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  • Changlin Luo

    (China Economics and Management Academy, Central University of Finance and Economics)

Abstract

First, this paper claims that the soft budget constraint is a contradiction in terms by showing that each "soft" budget line is in fact an incorrect one. By classifying the problems that were formerly conglomerated under the name of the "soft budget constraint," we show that a "hard" budget constraint exists for each specific problem. This leads to the realization that each of these problems originally belonged in a different analytic framework, and does not need to be related to the soft budget constraint. Finally, we illustrate how the former conclusions drawn from the "soft" perspective can be adjusted to form better interpretations under the original frameworks. Hence, we conclude that there is no such thing as the soft budget constraint.

Suggested Citation

  • Changlin Luo, 2014. "Questioning the Soft Budget Constraint," Annals of Economics and Finance, Society for AEF, vol. 15(1), pages 403-412, May.
    • Handle: RePEc:cuf:journl:y:2014:v:15:i:1:luochanglin
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    References listed on IDEAS

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    Cited by:

    1. Alfred Greiner, 2020. "Public Debt in a Descriptive Endogenous Growth Model," Annals of Economics and Finance, Society for AEF, vol. 21(1), pages 173-187, May.
    2. Kenji Tsuji, 2015. "Bank Capital Regulation and Soft Budget Constraints," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 21(1), pages 33-40, March.

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    More about this item

    Keywords

    Soft budget constraint; Dynamic commitment; Paternalism; Competitive rent seeking;
    All these keywords.

    JEL classification:

    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • P20 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - General

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