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Monopoly and Soft Budget Constraint

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  • Ilya R. Segal

Abstract

A benevolent government may decide to subsidize an unprofitable monopoly whose profits do not capture all the social surplus from its production. Anticipating this, the firm may underinvest in order to become unprofitable and extract state subsidies. The resulting welfare loss may exceed by many times the deadweight cost of monopoly pricing. Committing the firm to a price ceiling may soften its budget constraint and thus reduce welfare. Competition can harden budget constraints in industries in which free entry is socially excessive.

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  • Ilya R. Segal, 1998. "Monopoly and Soft Budget Constraint," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 596-609, Autumn.
    • Handle: RePEc:rje:randje:v:29:y:1998:i:autumn:p:596-609
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    Cited by:

    1. Céline Bignebat & Fabian Gouret, 2008. "Determinants and consequences of soft budget constraints. An empirical analysis using enterprise-level data in transition countries," Post-Print halshs-00308719, HAL.
    2. Thorsten Janus, 2009. "Aid and the Soft Budget Constraint," Review of Development Economics, Wiley Blackwell, vol. 13(2), pages 264-275, May.
    3. Emmanuelle Auriol & Pierre M. Picard, 2008. "Infrastructure and Public Utilities Privatization in Developing Countries," The World Bank Economic Review, World Bank, vol. 23(1), pages 77-100, November.
    4. Takuya Nakaizumi & Satoru Yano, 2017. "The soft budget constraint problem and hard budget solution of outward reinsurance markets for providing insurance to local economy against natural disaster," Asia-Pacific Journal of Regional Science, Springer, vol. 1(2), pages 625-637, October.
    5. Alexander Radygin & Revold Entov, 2014. "The Fundamental Privatization Theorem: Ideology, Evolution, Practice," Working Papers 0087, Gaidar Institute for Economic Policy, revised 2014.

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