IDEAS home Printed from https://ideas.repec.org/a/aka/aoecon/v64y2014isupplement1p25-79.html
   My bibliography  Save this article

The soft budget constraint

Author

Listed:
  • János Kornai

    (Harvard University, Cambridge MA, USA
    Corvinus University of Budapest, Budapest, Hungary)

Abstract

The author’s ideas on the soft budget constraint (SBC) were first expressed in 1976. Much progress has been made in understanding the problem over the ensuing four decades. The study takes issue with those who confine the concept to the process of bailing out loss-making socialist firms. It shows how the syndrome can appear in various organizations and forms in many spheres of the economy and points to the various means available for financial rescue. Single bailouts do not as such generate the SBC syndrome. It develops where the SBC becomes built into expectations. Special heed is paid to features generated by the syndrome in rescuer and rescuee organizations. The study reports on the spread of the syndrome in various periods of the socialist and the capitalist system, in various sectors. The author expresses his views on normative questions and on therapies against the harmful effects. He deals first with actual practice, then places the theory of the SBC in the sphere of ideas and models, showing how it relates to other theoretical trends, including institutional and behavioural economics and theories of moral hazard and inconsistency in time. He shows how far the intellectual apparatus of the SBC has spread in theoretical literature and where it has reached in the process of “canonization” by the economics profession. Finally, he reviews the main research tasks ahead.

Suggested Citation

  • János Kornai, 2014. "The soft budget constraint," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 64(supplemen), pages 25-79, November.
  • Handle: RePEc:aka:aoecon:v:64:y:2014:i:supplement1:p:25-79
    Note: Editors’ note: The Hungarian language series is published by the bilingual Hungarian–Slovak publishing house, Kalligram. Volume IV, containing 13 papers published already elsewhere, came out in Spring 2014. The full titles of these papers, as well as information pertaining to their accessibility in languages other than Hungarian can be found at the end of this study on pp. 78–79.
    as

    Download full text from publisher

    File URL: http://akademiai.com/content/h5x70230w71318l0/fulltext.pdf
    Download Restriction: subscription
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Lindbeck, Assar & Weibull, Jorgen W, 1988. "Altruism and Time Consistency: The Economics of Fait Accompli," Journal of Political Economy, University of Chicago Press, vol. 96(6), pages 1165-1182, December.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
    3. Dietrichson, Jens & Ellegård, Lina Maria, 2015. "Assist or desist? Conditional bailouts and fiscal discipline in local governments," European Journal of Political Economy, Elsevier, vol. 38(C), pages 153-168.
    4. Georg Gebhardt, 2009. "A Soft Budget Constraint Explanation for the Venture Capital Cycle," German Economic Review, Verein für Socialpolitik, vol. 10(1), pages 71-90, February.
    5. Jean-Michel Josselin & Fabio Padovano & Yvon Rocaboy, 2013. "Grant legislation vs. political factors as determinants of soft budget spending behaviors. Comparison between Italian and French regions," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 10(3), pages 317-354, December.
    6. Pun, Wing-chung, 1995. "The Kornai Effect and Soft Budget Constraints," Journal of Comparative Economics, Elsevier, vol. 21(3), pages 326-335, December.
    7. Yingyi Qian & Chenggang Xu, 1998. "Innovation and Bureaucracy Under Soft and Hard Budget Constraints," Review of Economic Studies, Oxford University Press, vol. 65(1), pages 151-164.
    8. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, December.
    9. Alexander Fink & Thomas Stratmann, 2011. "Institutionalized Bailouts and Fiscal Policy: Consequences of Soft Budget Constraints," Kyklos, Wiley Blackwell, vol. 64(3), pages 366-395, August.
    10. Desai, Raj M. & Olofsgard, Anders, 2006. "The political advantage of soft budget constraints," European Journal of Political Economy, Elsevier, vol. 22(2), pages 370-387, June.
    11. Lars P. Feld & Alexander Kalb & Marc-Daniel Moessinger & Steffen Osterloh, 2013. "Sovereign Bond Market Reactions to Fiscal Rules and No-Bailout Clauses - The Swiss Experience," CESifo Working Paper Series 4195, CESifo.
    12. Qian, Yingyi & Roland, Gerard, 1998. "Federalism and the Soft Budget Constraint," American Economic Review, American Economic Association, vol. 88(5), pages 1143-1162, December.
    13. Timothy Goodspeed, 2002. "Bailouts in a Federation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 9(4), pages 409-421, August.
    14. Huang, Haizhou & Xu, Chenggang, 1999. "Financial institutions and the financial crisis in East Asia," European Economic Review, Elsevier, vol. 43(4-6), pages 903-914, April.
    15. Goldfeld, Stephen M. & Quandt, Richard E., 1988. "Budget constraints, bailouts, and the firm under central planning," Journal of Comparative Economics, Elsevier, vol. 12(4), pages 502-520, December.
    16. Robinson, James A. & Torvik, Ragnar, 2009. "A political economy theory of the soft budget constraint," European Economic Review, Elsevier, vol. 53(7), pages 786-798, October.
    17. M. Dewatripont & E. Maskin, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 541-555.
    18. Eggleston, Karen & Shen, Yu-Chu, 2011. "Soft budget constraints and ownership: Empirical evidence from US hospitals," Economics Letters, Elsevier, vol. 110(1), pages 7-11, January.
    19. Lars P. Feld & Alexander Kalb & Marc-Daniel Moessinger & Steffen Osterloh, 2013. "Sovereign Bond Market Reactions to Fiscal Rules and No-Bailout Clauses - The Swiss Experience," CESifo Working Paper Series 4195, CESifo Group Munich.
    20. Marian Rizov & Jan Pokrivcak & Pavel Ciaian, 2013. "CAP Subsidies and Productivity of the EU Farms," Journal of Agricultural Economics, Wiley Blackwell, vol. 64(3), pages 537-557, September.
    21. Ben-Bassat, Avi & Dahan, Momi & Klor, Esteban F., 2016. "Is centralization a solution to the soft budget constraint problem?," European Journal of Political Economy, Elsevier, vol. 45(C), pages 57-75.
    22. Werner De Bondt, 2010. "The crisis of 2008 and financial reform," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 2(3), pages 137-156, October.
    23. Chang, Ha-Joon, 2000. "The Hazard of Moral Hazard: Untangling the Asian Crisis," World Development, Elsevier, vol. 28(4), pages 775-788, April.
    24. Karolina Kaiser & Emmanuelle Taugourdeau, 2013. "The timing of elections in federations: a disciplining device against soft budget constraints?," Public Choice, Springer, vol. 154(3), pages 197-215, March.
    25. Georg Gebhardt, 2009. "A Soft Budget Constraint Explanation for the Venture Capital Cycle," German Economic Review, Verein für Socialpolitik, vol. 10, pages 71-90, February.
    26. Anderson, James H. & Korsun, Georges & Murrell, Peter, 2000. "Which Enterprises (Believe They) Have Soft Budgets? Evidence on the Effects of Ownership and Decentralization in Mongolia," Journal of Comparative Economics, Elsevier, vol. 28(2), pages 219-246, June.
    27. Svensson, Jakob, 2000. "When is foreign aid policy credible? Aid dependence and conditionality," Journal of Development Economics, Elsevier, vol. 61(1), pages 61-84, February.
    28. Mykhayliv, Dariya & Zauner, Klaus G., 2013. "Investment behavior and ownership structures in Ukraine: Soft budget constraints, government ownership and private benefits of control," Journal of Comparative Economics, Elsevier, vol. 41(1), pages 265-278.
    29. Kurt R. Brekke & Luigi Siciliani & Odd Rune Straume, 2015. "Hospital Competition with Soft Budgets," Scandinavian Journal of Economics, Wiley Blackwell, vol. 117(3), pages 1019-1048, July.
    30. Yingyi Qian & Barry R. Weingast, 1997. "Federalism as a Commitment to Reserving Market Incentives," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 83-92, Fall.
    31. Thushyanthan Baskaran & Zohal Hessami, 2017. "Monetary integration, soft budget constraints, and the EMU sovereign debt crises," Economics and Politics, Wiley Blackwell, vol. 29(3), pages 252-275, November.
    32. Per Pettersson-Lidbom, 2010. "Dynamic Commitment and the Soft Budget Constraint: An Empirical Test," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 154-179, August.
    33. Magee, Karen L & Quandt, Richard E, 1994. "The Kornai Effect with Partial Bailouts and Taxes," Economic Change and Restructuring, Springer, vol. 27(1), pages 27-38.
    34. Bordignon, Massimo & Turati, Gilberto, 2009. "Bailing out expectations and public health expenditure," Journal of Health Economics, Elsevier, vol. 28(2), pages 305-321, March.
    35. Baskaran, Thushyanthan, 2012. "Soft budget constraints and strategic interactions in subnational borrowing: Evidence from the German States, 1975–2005," Journal of Urban Economics, Elsevier, vol. 71(1), pages 114-127.
    36. Chenggang Xu, 2011. "The Fundamental Institutions of China's Reforms and Development," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 1076-1151, December.
    37. Jin, Hehui & Qian, Yingyi & Weingast, Barry R., 2005. "Regional decentralization and fiscal incentives: Federalism, Chinese style," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1719-1742, September.
    38. Győrffy, Dóra, 2014. "Válság és válságkezelés Görögországban. A puha költségvetési korlát szerepe a gazdasági összeomlásban [Crisis and crisis management in Greece. The role of soft budget constraints in the economic co," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(1), pages 27-52.
    39. Lubomír Lízal & Jan Svejnar, 2002. "Investment, Credit Rationing, And The Soft Budget Constraint: Evidence From Czech Panel Data," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 353-370, May.
    40. Wladimir Andreff, 2011. "Some comparative economics of the organization of sports: Competition and regulation in north American vs. European professional team sports leagues," Post-Print halshs-00677436, HAL.
    41. 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.
    42. Ernesto Crivelli & Adam Leive & Mr. Thomas Stratmann, 2010. "Subnational Health Spending and Soft Budget Constraints in OECD Countries," IMF Working Papers 2010/147, International Monetary Fund.
    43. Dong Zhang & Owen Freestone, 2013. "China's Unfinished State-owned Enterprise Reforms," Economic Roundup, The Treasury, Australian Government, issue 2, pages 79-102, December.
    44. Goldfeld, Stephen M. & Quandt, Richard E., 1993. "Uncertainty, bailouts, and the Kornai effect," Economics Letters, Elsevier, vol. 41(2), pages 113-119.
    45. Li, Lixing, 2008. "Employment burden, government ownership and soft budget constraints: Evidence from a Chinese enterprise survey," China Economic Review, Elsevier, vol. 19(2), pages 215-229, June.
    46. Jonathan A. Rodden & Gunnar S. Eskeland (ed.), 2003. "Fiscal Decentralization and the Challenge of Hard Budget Constraints," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262182297, December.
    47. Schaffer, Mark E., 1989. "The credible-commitment problem in the center-enterprise relationship," Journal of Comparative Economics, Elsevier, vol. 13(3), pages 359-382, September.
    48. Thorsten Janus, 2009. "Aid and the Soft Budget Constraint," Review of Development Economics, Wiley Blackwell, vol. 13(2), pages 264-275, May.
    49. Asim Ijaz Khwaja & Atif Mian, 2005. "Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market," The Quarterly Journal of Economics, Oxford University Press, vol. 120(4), pages 1371-1411.
    50. Kornai, Janos & Weibull, Jorgen W., 1983. "Paternalism, buyers' and sellers' market," Mathematical Social Sciences, Elsevier, vol. 6(2), pages 153-169, November.
    51. Vahabi, Mehrdad, 2011. "Soft budget constraint and the parastatal sector," MPRA Paper 37926, University Library of Munich, Germany.
    52. Chow, Clement K.W. & Song, Frank M. & Wong, Kit Pong, 2010. "Investment and the soft budget constraint in China," International Review of Economics & Finance, Elsevier, vol. 19(2), pages 219-227, April.
    53. Gary S. Becker, 1983. "A Theory of Competition Among Pressure Groups for Political Influence," The Quarterly Journal of Economics, Oxford University Press, vol. 98(3), pages 371-400.
    54. Alexeev, Michael & Kim, Sunghwan, 2008. "The Korean financial crisis and the soft budget constraint," Journal of Economic Behavior & Organization, Elsevier, vol. 68(1), pages 178-193, October.
    55. Bergstrom, Theodore C, 1989. "A Fresh Look at the Rotten Kid Theorem--and Other Household Mysteries," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1138-1159, October.
    56. Wladimir Andreff, 2011. "Some comparative economics of the organization of sports: competition and regulation in north American vs. European professional team sports leagues," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 8(1), pages 3-27, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kornai, János, 2014. "Bevezetés A puha költségvetési korlát című kötethez [Introduction to the author s volume entitled Soft Budget Constraint]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 845-897.
    2. Kornai, János & Maskin, Eric & Roland, Gérard, 2022. "A puha költségvetési korlát - II [The soft budget constraint II]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(1), pages 94-132.
    3. J. Kornai & E. Maskin & G. Roland, 2004. "Understanding the Soft Budget Constraint," Voprosy Ekonomiki, NP Voprosy Ekonomiki, issue 11.
    4. Allers, Maarten & Merkus, Erik, 2013. "Soft budget constraint but no moral hazard? The Dutch local government bailout puzzle," Research Report 13014-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    5. repec:dgr:rugsom:13014-eef is not listed on IDEAS
    6. Mehrdad Vahabi, 2001. "The Soft Budget Constraint: A Theoretical Clarification," Post-Print hal-00629160, HAL.
    7. Thushyanthan Baskaran, 2013. "Do bailouts buy votes? Evidence from a panel of Hessian municipalities," Economics of Governance, Springer, vol. 14(3), pages 257-278, August.
    8. Gianmarco Daniele & Amedeo Piolatto & Willem Sas, 2018. "Who Sent You? Strategic Voting, Transfers and Bailouts in a Federation," Working Papers. Serie AD 2018-05, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    9. Jean-Michel Josselin & Fabio Padovano & Yvon Rocaboy, 2013. "Grant legislation vs. political factors as determinants of soft budget spending behaviors. Comparison between Italian and French regions," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 10(3), pages 317-354, December.
    10. Joel Wood, 2013. "The Effects of Bailouts and Soft Budget Constraints on the Environment," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 54(1), pages 127-137, January.
    11. Timothy J. Goodspeed, 2017. "Bailouts and Soft Budget Constraints in Decentralized Government: A Synthesis and Survey of an Alternative View of Intergovernmental Grant Policy," Hacienda Pública Española / Review of Public Economics, IEF, vol. 221(2), pages 113-134, June.
    12. Dietrichson, Jens & Ellegård, Lina Maria, 2015. "Assist or desist? Conditional bailouts and fiscal discipline in local governments," European Journal of Political Economy, Elsevier, vol. 38(C), pages 153-168.
    13. Xu, Cheng-Gang & Maskin, Eric, 2001. "Soft Budget Constraint Theories: From Centralization to the Market," CEPR Discussion Papers 2715, C.E.P.R. Discussion Papers.
    14. 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.
    15. Brucker, Herbert & Schroder, Philipp J.H. & Weise, Christian, 2005. "Can EU conditionality remedy soft budget constraints in transition countries?," Journal of Comparative Economics, Elsevier, vol. 33(2), pages 371-386, June.
    16. Foremny, Dirk & Solé-Ollé, Albert, 2016. "Who's coming to the rescue? Revenue-sharing slumps and implicit bailouts during the Great Recession," ZEW Discussion Papers 16-049, ZEW - Leibniz Centre for European Economic Research.
    17. Jäger, Jannik & Grigoriadis, Theocharis, 2016. "Soft budget constraints, European Central Banking and the financial crisis," Discussion Papers 2016/7, Free University Berlin, School of Business & Economics.
    18. Kornai, János, 1997. "Pénzügyi fegyelem és puha költségvetési korlát [Financial discipline and soft budget constraint]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(11), pages 940-953.
    19. Besfamille, Martin & Lockwood, Ben, 2004. "Are Hard Budget Constraints for Sub-National Governments Always Efficient?," The Warwick Economics Research Paper Series (TWERPS) 717, University of Warwick, Department of Economics.
    20. Sergey Sinelnikov & Pavel Kadochnikov & Ilya Trunin & Sergey Chetverikov & Marianne Vigneault, 2006. "Fiscal Federalism in Russia: Soft Budget Constraints of Regional Governments," Published Papers 47, Gaidar Institute for Economic Policy, revised 2012.
    21. Lu Ming & Zhao Chen & Yongqin Wang & Yan Zhang & Yuan Zhang & Changyuan Luo, 2013. "China’s Economic Development," Books, Edward Elgar Publishing, number 14502.

    More about this item

    Keywords

    soft budget constraint; bail-out; loss-making enterprise; moral hazard; time inconsistency;
    All these keywords.

    JEL classification:

    • B52 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Historical; Institutional; Evolutionary; Modern Monetary Theory;
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • P51 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aka:aoecon:v:64:y:2014:i:supplement1:p:25-79. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kriston, Orsolya (email available below). General contact details of provider: https://akademiai.hu/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.