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Policy burden, privatization and soft budget constraint

  • Lin, Justin Yifu
  • Li, Zhiyun

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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Article provided by Elsevier in its journal Journal of Comparative Economics.

Volume (Year): 36 (2008)
Issue (Month): 1 (March)
Pages: 90-102

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Handle: RePEc:eee:jcecon:v:36:y:2008:i:1:p:90-102
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622864

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  1. Grossman, Sanford J. & Hart, Oliver D., 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Scholarly Articles 3450060, Harvard University Department of Economics.
  2. Yingyi Qian & Gerard Roland, . "Federalism and the Soft Budget Constraint," Working Papers 97045, Stanford University, Department of Economics.
  3. 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.
  4. J�nos Kornai & Eric Maskin & G�rard Roland, 2003. "Understanding the Soft Budget Constraint," Journal of Economic Literature, American Economic Association, vol. 41(4), pages 1095-1136, December.
  5. Ilya R. Segal, 1998. "Monopoly and Soft Budget Constraint," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 596-609, Autumn.
  6. 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.
  7. Mathias Dewatripont & Eric Maskin, 1995. "Credit and efficiency in centralized and decentralized economies," ULB Institutional Repository 2013/9603, ULB -- Universite Libre de Bruxelles.
  8. Novshek, William, 1980. "Cournot Equilibrium with Free Entry," Review of Economic Studies, Wiley Blackwell, vol. 47(3), pages 473-86, April.
  9. 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.
  10. 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 422-27, May.
  11. Roller, Lars-Hendrik & Zhang, Zhentang, 2005. "Bundling of social and private goods and the soft budget constraint problem," Journal of Comparative Economics, Elsevier, vol. 33(1), pages 47-58, March.
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