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The Soft Budget Constraint : A Theoretical Clarification

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Author Info
Mehrdad VAHABI (EPEH-LED, UniversitŽ Paris 8)

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Abstract

In this paper, we have distinguished three different conceptions of the budget constraint (BC). The first one, introduced by Clower, regards the BC as a universal (unconditional) rational planning postulate. This does not imply market equilibrium or optimality. The second one, advocated by Kornai, considers the BC as a conditional empirical fact regarding the specific behavioural regularity of agents that is determined by particular institutional setups. The third one is implicitly held by a number of endogenous explanations of the SBC notably by the Complete (optimal) Contracts Theory and the Public Choice Theory. It regards the BC as a matter of choice by rational agents. While Clower and Kornai try to understand the BC in the context of disequilibrium or at least independently of equilibrium or optimality conditions, the partisans of the third approach integrate the BC in the process of dynamic optimization. Although Kornai's conception of the BC is irreconcilable with the third approach, it should be noted that Kornai's standpoint is contradictory. In his appraisal of the hard budget constraint (HBC) in case of competitive market economy, Kornai contends that the application of the BC is equivalent to the realization of Walras' Law. He then uses this ideal HBC as a normative reference in order to measure the inefficiencies of the soft budget constraint (SBC). In fact, Kornai's standpoint with regard to the HBC and his efficiency analysis are in tune with the third approach.

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Publisher Info
Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (REL - Recherches Economiques de Louvain) with number 2001024.

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Length: 40
Date of creation: 01 Jun 2001
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Handle: RePEc:ctl:louvre:2001024

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Related research
Keywords: soft and hard budget constraints; rationality postulate; optimization;

Find related papers by JEL classification:
D5 - Microeconomics - - General Equilibrium and Disequilibrium
L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
P2 - Economic Systems - - Socialist Systems and Transition Economies

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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  2. Bajt, A, 1991. " Irrelevance of the Soft Budget Constraint for the Shortage Phenomenon," Economic Change and Restructuring, Springer, vol. 24(1), pages 1-12.
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  5. Bai, Chong-en & Wang, Yijiang, 1998. "Bureaucratic Control and the Soft Budget Constraint," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 41-61, March. [Downloadable!] (restricted)
  6. Kornai, Janos, 1986. "The Soft Budget Constraint," Kyklos, Blackwell Publishing, vol. 39(1), pages 3-30.
  7. Clower, Robert & Leijonhufvud, Axel, 1975. "The Coordination of Economic Activities: A Keynesian Perspective," American Economic Review, American Economic Association, vol. 65(2), pages 182-88, May. [Downloadable!] (restricted)
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    Other versions:
  9. Maskin, Eric S., 1996. "Theories of the soft budget-constraint," Japan and the World Economy, Elsevier, vol. 8(2), pages 125-133, June. [Downloadable!] (restricted)
  10. Goldfeld, Stephen M. & Quandt, Richard E., 1988. "Budget constraints, bailouts, and the firm under central planning," Journal of Comparative Economics, Elsevier, vol. 12(4), pages 502-520, December. [Downloadable!] (restricted)
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    Other versions:
  15. Li, David D., 1998. "Insider control and the soft budget constraint: a simple theory," Economics Letters, Elsevier, vol. 61(3), pages 307-311, December. [Downloadable!] (restricted)
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    Other versions:
  21. Goldfeld, Stephen M. & Quandt, Richard E., 1990. "Output targets, the soft budget constraint and the firm under central planning," Journal of Economic Behavior & Organization, Elsevier, vol. 14(2), pages 205-222, October. [Downloadable!] (restricted)
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  23. Qian, Yingyi & Roland, Gérard, 1994. "Regional Decentralization and the Soft Budget Constraint: The Case of China," CEPR Discussion Papers 1013, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  24. Hillman, Arye L & Katz, Eliakim & Rosenberg, Jacob, 1987. "Workers as Insurance: Anticipated Government Assistance and Factor Demand," Oxford Economic Papers, Oxford University Press, vol. 39(4), pages 813-20, December. [Downloadable!] (restricted)
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  28. Huang, Haizhou & Xu, Chenggang, 1998. "Soft Budget Constraint and the Optimal Choices of Research and Development Projects Financing," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 62-79, March. [Downloadable!] (restricted)
  29. Ilya R. Segal, 1998. "Monopoly and Soft Budget Constraint," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 596-609, Autumn. [Downloadable!] (restricted)
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  31. Becker, Gary S, 1983. "A Theory of Competition among Pressure Groups for Political Influence," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 371-400, August. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Nikolay Nenovsky & Evgeni Peev & Todor Yalamov, 2003. "Banks-Firms Nexus under the Currency Board: Empirical Evidence from Bulgaria," William Davidson Institute Working Papers Series 555, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  2. 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. [Downloadable!]
  3. Vahabi, Mehrdad, 2002. "The Soft Budget Constraint: An Institutionalist Approach," MPRA Paper 17649, University Library of Munich, Germany. [Downloadable!]
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