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A Theory of the Soft-Budget Constraint

Author

Listed:
  • Chong-en Bai

    () (Boston College)

  • Yijiang Wang

    (University of Minnesota)

Abstract

This paper studies the soft budget constraint problem in a principal-agent model. The agent screens projects of and makes initial investment in the projects that have passed the screening. He then finds the types of the funded projects and decides to close some of the ex post inefficient ones among them. Closing projects sends an unfavorable signal about the agent's screening effort. Under the ex ante efficient contract, the agent has incentive to refinance some of the ex post inefficient projects.

Suggested Citation

  • Chong-en Bai & Yijiang Wang, 1995. "A Theory of the Soft-Budget Constraint," Boston College Working Papers in Economics 298., Boston College Department of Economics.
  • Handle: RePEc:boc:bocoec:298
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    File URL: http://fmwww.bc.edu/EC-P/wp298.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Vahabi, Mehrdad, 2003. "La contrainte budgétaire lâche et la théorie économique
      [Soft Budget Constraint and Economic Theory]
      ," MPRA Paper 17651, University Library of Munich, Germany.
    2. Li, David D. & Liang, Minsong, 1998. "Causes of the Soft Budget Constraint: Evidence on Three Explanations," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 104-116, March.
    3. Li, David D., 1998. "Insider control and the soft budget constraint: a simple theory," Economics Letters, Elsevier, vol. 61(3), pages 307-311, December.

    More about this item

    Keywords

    soft budget; planner; project screening; information;

    JEL classification:

    • P51 - Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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