Soft Budget Constraints, Firm Commitments, and the Social Safety Net
It is shown that the inefficiencies created by the soft budget constraint enjoyed by enterprises in Eastern Europe and elsewhere will continue so long as governments are unable credibly to threaten not to bail out loss makers. The institution of a suitable social safety net can strengthen commitment to a hard budget constraint. The burden on the social safety net can be reduced by the (endogenous) development of financial markets.
Volume (Year): 39 (1992)
Issue (Month): 2 (June)
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