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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.

Suggested Citation

  • 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. Haizhou Huang & Chenggang Xu, 2001. "Financial Institutions, Contagious Risks, and Financial Crises," William Davidson Institute Working Papers Series 444, William Davidson Institute at the University of Michigan.
    2. 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.
    3. Dmitry Gershenson & Maria Amelina, 2002. "Seductions of an Underdevelopment Trap; Systemic Impediments to Agricultural Reform in Russia," IMF Working Papers 02/126, International Monetary Fund.
    4. Eric S. Maskin, 1999. "Recent Theoretical Work on the Soft Budget Constraint," American Economic Review, American Economic Association, vol. 89(2), pages 421-425, May.
    5. Everaert, Greetje M.M., 2004. "The political economy of restructuring and subsidisation : an international perspective," BOFIT Discussion Papers 12/2004, Bank of Finland, Institute for Economies in Transition.
    6. Radygin, Alexander & Entov, Revold, 2013. ""Fundamental" theorem of privatization: ideology, evolution, practice," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, pages 7-45, December.
    7. Glowicka, Ela, 2006. "Effectiveness of bailouts in the EU," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 176, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    8. J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 12.

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