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The Soft Budget Constraint

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  • JÁNOS KORNAI*

Abstract

SUMMARY The ‘softening’ of the budget constraint appears when the strict relationship between the expenditure and the earnings of an economic unit (firm, household, etc.) has been relaxed, because excess expenditure will be paid by some other institution, typically be the paternalistic State. The higher the subjective probability that excess expenditure will be covered by external assistance, the softer the budget constraint. The main focus of the paper is on the firm. There are several ways of ‘softening’ the budget constraint: subsidies, tax‐exemptions, soft credits and so on. The softness weakens price responsiveness, leads to losses in efficiency and under certain conditions may generate excess demand. The paper examines the ‘soft budget constraint’ syndrome in Hungary, Yugoslavia, and China, i.e. in the economies pioneering in the introduction of market‐oriented decentralization reforms. Socialist economies exhibit a rather extreme degree of this phenomenon, which to a lesser degree can be observed in mixed economies as well. ZUSAMMENFASSUNG Die “Aufweichung” der Budgetrestriktionen zeigt sich, wenn der enge Zusammen‐hang zwischen den Ausgaben und Einnahmen einer Wirtschaftseinheit (Firma, Haus‐halt usw.) sich auflockert, weil die Mehrausgabe von einer anderen Institution, im typischen Falle vom paternalistischen Staat gedeckt wird. Je höher die subjektive Wahrscheinlichkeit ist, dass die Mehrausgabe durch eine aussenstehende Hilfsquelle gedeckt wird, um so weicher ist die Budgetrestriktion. Im Mittelpunkt dieser Abhand‐lung steht das Unternehmen. Es gibt mehrere Möglichkeiten zur “Aufweichung” der Budgetrestriktion: Subventionen, Steuerfreiheit, weiche Kredite usw. Die Weiche schwächt die Preissensibilität, führt zu Verlusten in der Wirksamkeit, und unter gewissen Umständen kann eine Mehrnachfrage herbeigeführt werden. Die Abhand‐lung untersucht das Phanomen der “weichen Budgetrestriktion” in Ungarn, Jugosla‐wien und China, das heisst in den Wirtschaften, die in der Einführung von marktorien‐tierten Dezentralisationsreformen bahnbrechend sind. Die sozialistischen Wirtschaften weisen einen ziemlich hohen Grad dieses Phänomens auf, das in geringerem Masse auch in gemischten Wirtschaften zu beobachten ist. RÉSUMÉ L'adoucissement” de la contrainte budgétaire apparaît lors du relâchement de la stricte relation entre les dépenses et les recettes d'une unitééconomique (entreprise, ménage…). Cela survient quand l'excés de dépenses est pris en charge par une autre institution, l'exemple type en étant l'Etat‐Providence. II existe plusieurs façons “d'adoucir” la contrainte budgétaire: les subventions, les abattements fiscaux, les crédits bonifiés, etc. Cet adoucissement affaiblit la capacityé de réponse par les prix, il conduit à des pertes d'efficacité, et, dans certaines conditions, peut engendrer un excès de demande. On peut contempler le stade ultime de ce phénomène dans les économies socialistes, mais les économies mixtes en présentent certains symptômes. L'auteur examine le syndrôme de “l'adoucissement” de la contrainte budgétaire en Hongrie, en Yougoslavie et en Chine, c'est‐à‐dire dans les économies socialistes qui, les premierès, ont tenté une certaine décentralisation économique.

Suggested Citation

  • János Kornai*, 1986. "The Soft Budget Constraint," Kyklos, Wiley Blackwell, vol. 39(1), pages 3-30, February.
  • Handle: RePEc:bla:kyklos:v:39:y:1986:i:1:p:3-30
    DOI: 10.1111/j.1467-6435.1986.tb01252.x
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    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 - Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems

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