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A Model of Budget Constraint and Enterprise Restructuring

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  • Jihe Song
  • Shumei Gao

Abstract

This paper presents a managerial utility maximisation framework to investigate the impact of budget constraints on enterprise restructuring in transitional economies. Assuming that managerial effort is allocated between restructuring and subsidy seeking, and using non-linear programming technique, we have demonstrated that hardening budget constraint by reducing state subsidies to state firms have positive effects on managerial incentives towards enterprise restructuring. Our results apply both to the perfectly competitive case and the monopolistic case. We have, however, uncovered a perverse relationship between labour demand and wage rate.

Suggested Citation

  • Jihe Song & Shumei Gao, 2000. "A Model of Budget Constraint and Enterprise Restructuring," CERT Discussion Papers 0001, Centre for Economic Reform and Transformation, Heriot Watt University.
    • Handle: RePEc:hwe:certdp:0001
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    References listed on IDEAS

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    7. 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.
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    Cited by:

    1. Ileana Tache & Gheorghita Dinca & Melinda Keul, 2008. "Fiscal policy making in the new EU post-communist countries," EKONOMIAZ. Revista vasca de Economía, Gobierno Vasco / Eusko Jaurlaritza / Basque Government, vol. 69(03), pages 80-107.

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    More about this item

    JEL classification:

    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • P31 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions

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