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Does Protection Harden Budget Constraints?

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Author Info

  • Greetje Everaert
  • Hylke Vandenbussche

Abstract

In this paper we analyse the effects of soft budget constraints in an international context. Firstly, we show that soft budget constraints in an exporting country lead to higher levels of trade protection in the recipient country. Secondly, the model predicts that protectionist trade policy helps to harden budget softness in the exporting country. We therefore argue that, when industrial policy fails to enforce financial discipline, trade policy can take over this role. Finally, we discuss potential implications of our model for EU-policy with respect to Central and Eastern Countries.

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File URL: http://www.econ.kuleuven.be/licos/publications/dp/dp98.pdf
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Bibliographic Info

Paper provided by LICOS - Centre for Institutions and Economic Performance, KU Leuven in its series LICOS Discussion Papers with number 9801.

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Length: 36 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:lic:licosd:9801

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Related research

Keywords: Soft Budget Constraints; Transition; Trade Policy; Oligopoly;

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