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A Theory of Shortage in Socialist Economies Based on the "Soft Budget Constraint."


  • Qian, Yingyi


This paper attributes shortages of goods in socialist economies to the soft financial constraints that firms in such economies face. A 'soft budget constraint' problem arises when the state bank is unable to make a credible commitment not to refinance bad projects once some investment costs are sunk. In such a situation, if a consumer good is also demanded by firms as an input and the seller cannot separate firms from households, the high market-clearing price would lead to welfare losses because too many bad projects would start and crowd out household consumption. Copyright 1994 by American Economic Association.

Suggested Citation

  • Qian, Yingyi, 1994. "A Theory of Shortage in Socialist Economies Based on the "Soft Budget Constraint."," American Economic Review, American Economic Association, vol. 84(1), pages 145-156, March.
  • Handle: RePEc:aea:aecrev:v:84:y:1994:i:1:p:145-56

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    References listed on IDEAS

    1. Coppinger, Vicki M & Smith, Vernon L & Titus, Jon A, 1980. "Incentives and Behavior in English, Dutch and Sealed-Bid Auctions," Economic Inquiry, Western Economic Association International, vol. 18(1), pages 1-22, January.
    2. Brookshire, David S & Coursey, Don L, 1987. "Measuring the Value of a Public Good: An Empirical Comparison of Elicitation Procedures," American Economic Review, American Economic Association, vol. 77(4), pages 554-566, September.
    3. Don Coursey, 1987. "Markets and the measurement of value," Public Choice, Springer, vol. 55(3), pages 291-297, October.
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