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Hardened Budgets and Enterprise Restructuring: Theory and an Application to Romania

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  • Coricelli, Fabrizio
  • Djankov, Simeon

Abstract

We identify the presence of soft budgets and analyse their impact on enterprise restructuring in Romania over the initial transition period. A simple analytical framework is developed to show that hardened budget constraints foster rationalization of costs, but not active restructuring. The latter requires availability of external financing. The model emphasises the importance of the credibility of hard budgets. The empirical findings are consistent with the predictions of the model. Using a sample of over 4,000 Romanian enterprises during 1992-95, we show that hardened budget constraints induce labour shedding. There is no evidence of positive effects on active restructuring, which we define as new investments.
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  • Coricelli, Fabrizio & Djankov, Simeon, 2001. "Hardened Budgets and Enterprise Restructuring: Theory and an Application to Romania," Journal of Comparative Economics, Elsevier, vol. 29(4), pages 749-763, December.
  • Handle: RePEc:eee:jcecon:v:29:y:2001:i:4:p:749-763
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    Cited by:

    1. 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.
    2. Megginson, William L., 2005. "The economics of bank privatization," Journal of Banking & Finance, Elsevier, vol. 29(8-9), pages 1931-1980, August.
    3. Druk-Gal, Bat-Sheva & Yaari, Varda, 2006. "Incumbent employees' resistance to implementing privatization policy," Journal of Economic Behavior & Organization, Elsevier, vol. 59(3), pages 374-405, March.
    4. Sinani, Evis & Meyer, Klaus E., 2004. "Spillovers of technology transfer from FDI: the case of Estonia," Journal of Comparative Economics, Elsevier, vol. 32(3), pages 445-466, September.
    5. Changlin Luo, 2014. "Questioning the Soft Budget Constraint," Annals of Economics and Finance, Society for AEF, vol. 15(1), pages 403-412, May.
    6. Rizov, Marian, 2005. "Transition and enterprise restructuring: the role of budget constraints and bankruptcy costs," Economics Letters, Elsevier, vol. 86(1), pages 129-134, January.
    7. Toyofuku, Kenta, 2013. "Stability or restructuring? Macroeconomic dynamics under soft budget constraint problems," Economic Systems, Elsevier, vol. 37(4), pages 625-649.
    8. J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 12.
    9. Bignebat, C. & Gouret, F., 2006. "Which Firms Have a Soft Loan ? Managers' Believes in a Cross-Country Survey in Transition Economies," Working Papers MOISA 200603, UMR MOISA : Marchés, Organisations, Institutions et Stratégies d'Acteurs : CIHEAM-IAMM, CIRAD, INRA, Montpellier SupAgro - Montpellier, France.
    10. Kornai, János & Maskin, Eric & Roland, Gérard, 2004. "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(9), pages 777-809.
    11. Murrell, Peter, 2003. "Firms facing new institutions: transactional governance in Romania," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 695-714, December.
    12. Asaftei, Gabriel & Kumbhakar, Subal C. & Mantescu, Dorin, 2008. "Ownership, business environment and productivity change," Journal of Comparative Economics, Elsevier, vol. 36(3), pages 498-509, September.
    13. Megginson, William L. & Ullah, Barkat & Wei, Zuobao, 2014. "State ownership, soft-budget constraints, and cash holdings: Evidence from China’s privatized firms," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 276-291.
    14. 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.
    15. Rizov, Marian, 2004. "Shift To Individual Farming And The Productivity Growth Of Transition Agriculture," 2004 Annual meeting, August 1-4, Denver, CO 20116, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    16. Wendong Shi & Jingwei Sun, 2016. "The impact of privatization on efficiency and profitability," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 24(3), pages 393-420, July.

    More about this item

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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