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The Soft Budget Constraint : A Theoretical Clarification

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  • Mehrdad VAHABI

    (EPEH-LED, Université Paris 8)

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

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Cited by:
  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, William Davidson Institute at the University of Michigan 555, William Davidson Institute at the University of Michigan.
  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.
  3. Vahabi, Mehrdad, 2002. "The Soft Budget Constraint: An Institutionalist Approach," MPRA Paper 17649, University Library of Munich, Germany.

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