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Policy burden, privatization and soft budget constraint

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  • Lin, Justin Yifu
  • Li, Zhiyun

Abstract

We propose a new cause for the pervasive syndromes of soft budget constraint (SBC) in socialist and transition economies, that is, the policy burdens on enterprises result in the SBC problems. The policy burdens induce low effort input of firm manager and thus the low efficiency of production. And with the policy burdens, increasing market competition will make the SBC syndromes arise more likely. Privatization will not necessarily harden the budget constraint of the enterprise. On the contrary, when a SOE still bears the policy burdens, privatization will only aggravate the SBC problems. Because in this case, a private enterprise will demand more ex post subsidies from the government, than a SOE under the same condition. Our results help to explain many stylized facts in transition and socialist economies. Journal of Comparative Economics 36 (1) (2008) 90-102.

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  • Lin, Justin Yifu & Li, Zhiyun, 2008. "Policy burden, privatization and soft budget constraint," Journal of Comparative Economics, Elsevier, vol. 36(1), pages 90-102, March.
  • Handle: RePEc:eee:jcecon:v:36:y:2008:i:1:p:90-102
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    References listed on IDEAS

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    1. J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 12.
    2. Lin, Justin Yifu & Cai, Fang & Li, Zhou, 1998. "Competition, Policy Burdens, and State-Owned Enterprise Reform," American Economic Review, American Economic Association, vol. 88(2), pages 422-427, May.
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    5. Guofu Tan & Justin Yifu Lin, 1999. "Policy Burdens, Accountability, and the Soft Budget Constraint," American Economic Review, American Economic Association, vol. 89(2), pages 426-431, May.
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    8. Lin, Justin Yifu, 2003. "Development Strategy, Viability, and Economic Convergence," Economic Development and Cultural Change, University of Chicago Press, vol. 51(2), pages 276-308, January.
    9. Schmidt, Klaus M, 1996. "The Costs and Benefits of Privatization: An Incomplete Contracts Approach," Journal of Law, Economics, and Organization, Oxford University Press, vol. 12(1), pages 1-24, April.
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    11. Ilya R. Segal, 1998. "Monopoly and Soft Budget Constraint," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 596-609, Autumn.
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