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A Theory of the Soft-Budget Constraint

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Author Info

  • Chong-en Bai

    ()
    (Boston College)

  • Yijiang Wang

    (University of Minnesota)

Abstract

This paper studies the soft budget constraint problem in a principal-agent model. The agent screens projects of and makes initial investment in the projects that have passed the screening. He then finds the types of the funded projects and decides to close some of the ex post inefficient ones among them. Closing projects sends an unfavorable signal about the agent's screening effort. Under the ex ante efficient contract, the agent has incentive to refinance some of the ex post inefficient projects.

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File URL: http://fmwww.bc.edu/EC-P/wp298.pdf
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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 298..

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Length: 33 pages
Date of creation: Aug 1995
Date of revision:
Handle: RePEc:boc:bocoec:298

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Related research

Keywords: soft budget; planner; project screening; information;

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References

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  1. Sanford Grossman & Oliver Hart, . "An Analysis of the Principal-Agent Problem," Rodney L. White Center for Financial Research Working Papers 15-80, Wharton School Rodney L. White Center for Financial Research.
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  8. Ortuna-Ortin, I. & Roemer, J.E. & Silvestre, J., 1990. "Market Socialism," Papers 355, California Davis - Institute of Governmental Affairs.
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  12. repec:fth:harver:1512 is not listed on IDEAS
  13. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
  14. Ching-to Albert Ma, 1990. "Renegotiation and Optimality in Agency Contracts," Papers 0004, Boston University - Industry Studies Programme.
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  16. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-67, November.
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Citations

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Cited by:
  1. Vahabi, Mehrdad, 2003. "La contrainte budgétaire lâche et la théorie économique
    [Soft Budget Constraint and Economic Theory]
    ," MPRA Paper 17651, University Library of Munich, Germany.
  2. Li, David D., 1998. "Insider control and the soft budget constraint: a simple theory," Economics Letters, Elsevier, vol. 61(3), pages 307-311, December.

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