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The Limits of Discipline: Ownership and Hard Budget Constraints in the Transition Economies

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Author Info
Frydman, R.
Gray, C.
Hessel, M.
Rapaczynski, A.
Abstract

This paper argues that the imposition of financial discipline is not sufficient to remedy ownership and governance-related deficiencies of corporate performance. Using evidence from the postcommunist transition economies, the paper shows that a policy of hard budget constraints falters when state firms, because of inferior revenue performance and lesser willingness to meet payment obligations, continue to pose higher credit risk than privatized firms. The brunt of state firms' lower creditworthiness falls on state creditors. But the "softness" of these creditors is unavoidable if it prevents a demise of firms that are in principle capable of successful restructuring through ownership changes.

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Paper provided by C.V. Starr Center for Applied Economics, New York University in its series Working Papers with number 00-02.

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Length: 38 pages
Date of creation: 2000
Date of revision:
Handle: RePEc:cvs:starer:00-02

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Postal: C.V. Starr Center, Department of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012
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Web page: http://econ.as.nyu.edu/object/econ.cvstarr.html
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Postal: C.V. Starr Center, Department of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012
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Related research
Keywords: OWNERSHIP; FINANCIAL DISCIPLINE; PERFORMANCE; TRANSITION.;

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Find related papers by JEL classification:
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
P17 - Economic Systems - - Capitalist Systems - - - Performance and Prospects
P27 - Economic Systems - - Socialist Systems and Transition Economies - - - Performance and Prospects
P31 - Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions

References listed on IDEAS
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. Djankov, Simeon, 1999. "The Enterprise Isolation Program in Romania," Journal of Comparative Economics, Elsevier, vol. 27(2), pages 281-293, June. [Downloadable!] (restricted)
    Other versions:
  2. Brian Pinto & Marek Belka & Stefan Krajewski, 1993. "Transforming State Enterprises in Poland: Evidence on Adjustment by Manufacturing Firms," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1993-1), pages 213-270. [Downloadable!]
  3. Dewatripont, M & Maskin, E, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," Review of Economic Studies, Blackwell Publishing, vol. 62(4), pages 541-55, October. [Downloadable!] (restricted)
  4. Berglof, Erik & Roland, Gerard, 1998. "Soft Budget Constraints and Banking in Transition Economies," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 18-40, March. [Downloadable!] (restricted)
  5. Janet Mitchell, 1999. "Theories of Soft Budget Constraints and the Analysis of Banking Crises," William Davidson Institute Working Papers Series 233, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  6. 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)
  7. Perotti, E. C., 1998. "Inertial credit and opportunistic arrears in transition," European Economic Review, Elsevier, vol. 42(9), pages 1703-1725, November. [Downloadable!] (restricted)
  8. Schaffer, Mark E., 1998. "Do Firms in Transition Economies Have Soft Budget Constraints? A Reconsideration of Concepts and Evidence," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 80-103, March. [Downloadable!] (restricted)
  9. Qian, Yingyi & Roland, Gerard, 1998. "Federalism and the Soft Budget Constraint," American Economic Review, American Economic Association, vol. 88(5), pages 1143-62, December. [Downloadable!] (restricted)
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  10. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June. [Downloadable!] (restricted)
  11. Fabrizio Coricelli & Alfredo Thorne, 1993. "Dealing with enterprises' bad loans," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 1(1), pages 112-115, 01. [Downloadable!] (restricted)
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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. Janos Kornai & Eric Maskin & Gerard Roland, 2002. "Understanding the Soft Budget Constraint," Economics Working Papers 0019, Institute for Advanced Study, School of Social Science. [Downloadable!]
    Other versions:
  2. Wendy Carlin & Steven Fries & Mark Schaffer & Paul Seabright, 2001. "Competition and Enterprise Performance in Transition Economies: Evidence from a Cross-country Survey," William Davidson Institute Working Papers Series 376, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
    Other versions:
  3. Jan Hanousek & Evžen Kočenda, 2008. "Potential of the state to control privatized firms," Economic Change and Restructuring, Springer, vol. 41(2), pages 167-186, June. [Downloadable!] (restricted)
  4. Wendy Carlin & Steven Fries & Mark Schaffer & Paul Seabright, 2001. "Competition and Enterprise Performance in Transition Economies from a Cross-Country Survey," CERT Discussion Papers 0101, Centre for Economic Reform and Transformation, Heriot Watt University. [Downloadable!]
  5. Antje Hildebrandt, 2002. "Too many to fail? Inter-enterprise arrears in transition economies," Development and Comp Systems 0212001, EconWPA. [Downloadable!]
  6. Hildebrandt, Antje, 2002. "Too many to fail? Inter-enterprise arrears in transition economies," BOFIT Discussion Papers 11/2002, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
  7. Lingang Song & Yang Yao, 2004. "Impacts of Privatization on Firm Performance in China," Macroeconomics Working Papers 449, East Asian Bureau of Economic Research. [Downloadable!]
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