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A political economy theory of the soft budget constraint

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  • Robinson, James A.
  • Torvik, Ragnar

Abstract

Why do soft budget constraints exist and persist? In this paper we argue that the prevalence of soft budget constraints can be best explained by the political desirability of softness. We develop an infinite horizon political economy model where neither democratic nor autocratic politicians can commit to policies that are not ex post optimal. We show that because of the dynamic commitment problem inherent in the soft budget constraint, politicians can in essence commit to make transfers to entrepreneurs which otherwise they would not be able to do. This encourages such entrepreneurs to support them politically. Though the soft budget constraint may induce economic inefficiency, it may be politically rational because it influences the probability of political survival. In consequence, even when information is complete, politicians may fund bad projects which they anticipate they will have to bail out in the future. We show that, maybe somewhat surprisingly, dictators who are less likely to lose power, are more likely to use the soft budget constraint as a strategy to gain political support.

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  • 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.
  • Handle: RePEc:eee:eecrev:v:53:y:2009:i:7:p:786-798
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    Cited by:

    1. Alberto Cavaliere & Simona Scabrosetti, 2008. "Privatization And Efficiency: From Principals And Agents To Political Economy," Journal of Economic Surveys, Wiley Blackwell, vol. 22(4), pages 685-710, September.
    2. Hartwell, Christopher A., 2016. "The institutional basis of efficiency in resource-rich countries," Economic Systems, Elsevier, vol. 40(4), pages 519-538.
    3. Emilson Silva, 2015. "Efficient earmarking under decentralized fiscal commitments," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(4), pages 683-701, August.
    4. Nelly Exbrayat & Thierry Madiès & Stéphane Riou, 2013. "Bailout policy in a globalized economy," Post-Print halshs-00945455, HAL.
    5. Dani Rodrik, 2013. "When Ideas Trump Interests : Preferences, World Views, and Policy  Innovations," Working Papers id:5558, eSocialSciences.
    6. 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, IEF, vol. 221(2), pages 113-134, June.
    7. Eggleston, Karen, 2008. "Soft budget constraints and the property rights theory of ownership," Economics Letters, Elsevier, vol. 100(3), pages 425-427, September.
    8. Robinson, James A. & Torvik, Ragnar & Verdier, Thierry, 2017. "The political economy of public income volatility: With an application to the resource curse," Journal of Public Economics, Elsevier, pages 243-252.
    9. Leopoldo Fergusson & James A. Robinson & Ragnar Torvik & Juan F. Vargas, 2016. "The Need for Enemies," Economic Journal, Royal Economic Society, vol. 126(593), pages 1018-1054, June.
    10. Karolina Kaiser & Emmanuelle Taugourdeau, 2013. "The timing of elections in federations: a disciplining device against soft budget constraints?," Public Choice, Springer, pages 197-215.
    11. János Kornai, 2014. "The soft budget constraint," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 64(supplemen), pages 25-79, November.
    12. 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.
    13. Boardman, Anthony E. & Vining, Aidan R. & Weimer, David L., 2016. "The long-run effects of privatization on productivity: Evidence from Canada," Journal of Policy Modeling, Elsevier, vol. 38(6), pages 1001-1017.
    14. 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.
    15. Giuseppe Cinquegrana & Serena Migliardo & Domenico Sarno, 2016. "Comparative analysis of private and public provision of the water and waste services by the Italian municipalities," ECONOMIA PUBBLICA, FrancoAngeli Editore, vol. 2016(3), pages 149-176.
    16. Nelly Exbrayat & Thierry Madiès & Stéphane Riou, 2013. "Abram Bergson," Working Papers 1340, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    17. Paleologou, Suzanna-Maria, 2013. "Asymmetries in the revenue–expenditure nexus: A tale of three countries," Economic Modelling, Elsevier, vol. 30(C), pages 52-60.
    18. Enrique Gilles, 2010. "Political intervention in economic activity," DOCUMENTOS DE TRABAJO 007180, UNIVERSIDAD DEL ROSARIO.

    More about this item

    Keywords

    Political economy Investment Development;

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • O20 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - General

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