IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

The Soft Budget Constraint : A Theoretical Clarification

  • Mehrdad VAHABI

    (EPEH-LED, Université Paris 8)

In this paper, we have distinguished three different conceptions of the budget constraint (BC). The first one, introduced by Clower, regards the BC as a universal (unconditional) rational planning postulate. This does not imply market equilibrium or optimality. The second one, advocated by Kornai, considers the BC as a conditional empirical fact regarding the specific behavioural regularity of agents that is determined by particular institutional setups. The third one is implicitly held by a number of endogenous explanations of the SBC notably by the Complete (optimal) Contracts Theory and the Public Choice Theory. It regards the BC as a matter of choice by rational agents. While Clower and Kornai try to understand the BC in the context of disequilibrium or at least independently of equilibrium or optimality conditions, the partisans of the third approach integrate the BC in the process of dynamic optimization. Although Kornai's conception of the BC is irreconcilable with the third approach, it should be noted that Kornai's standpoint is contradictory. In his appraisal of the hard budget constraint (HBC) in case of competitive market economy, Kornai contends that the application of the BC is equivalent to the realization of Walras' Law. He then uses this ideal HBC as a normative reference in order to measure the inefficiencies of the soft budget constraint (SBC). In fact, Kornai's standpoint with regard to the HBC and his efficiency analysis are in tune with the third approach.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://sites.uclouvain.be/econ/DP/REL/2001024.pdf
Download Restriction: no

Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (REL - Recherches Economiques de Louvain) with number 2001024.

as
in new window

Length: 40
Date of creation: 01 Jun 2001
Date of revision:
Handle: RePEc:ctl:louvre:2001024
Contact details of provider: Postal: Place Montesquieu 3, 1348 Louvain-la-Neuve (Belgium)
Fax: +32 10473945
Web page: http://www.uclouvain.be/ires
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Michael Keren, 1993. "On the (Im)possibility of Market Socialism," Eastern Economic Journal, Eastern Economic Association, vol. 19(3), pages 333-344, Summer.
  2. Ilya R. Segal, 1998. "Monopoly and Soft Budget Constraint," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 596-609, Autumn.
  3. Boycko, Maxim & Shleifer, Andrei & Vishny, Robert W, 1996. "A Theory of Privatisation," Economic Journal, Royal Economic Society, vol. 106(435), pages 309-19, March.
  4. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1994. "Renegotiation Design with Unverifiable Information," Scholarly Articles 12375014, Harvard University Department of Economics.
  5. Mehrdad Vahabi, 1998. "The Relevance of the Marshallian Concept of Normality in Interior and in Inertial Dynamics as Revisited by G. SHACKLE and J. KORNAI," Post-Print hal-00629181, HAL.
  6. Hart, Oliver D & Moore, John, 1988. "Incomplete Contracts and Renegotiation," Econometrica, Econometric Society, vol. 56(4), pages 755-85, July.
  7. Clower, Robert & Leijonhufvud, Axel, 1975. "The Coordination of Economic Activities: A Keynesian Perspective," American Economic Review, American Economic Association, vol. 65(2), pages 182-88, May.
  8. David E. Wildasin, 2001. "Externalities and Bailouts: Hard and Soft Budget Constraints in Intergovernmental Fiscal Relations," Public Economics 0112002, EconWPA.
  9. Goldfeld, Stephen M. & Quandt, Richard E., 1988. "Budget constraints, bailouts, and the firm under central planning," Journal of Comparative Economics, Elsevier, vol. 12(4), pages 502-520, December.
  10. Bai, Chong-en & Wang, Yijiang, 1998. "Bureaucratic Control and the Soft Budget Constraint," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 41-61, March.
  11. Tobin, James, 1975. "Keynesian Models of Recession and Depression," American Economic Review, American Economic Association, vol. 65(2), pages 195-202, May.
  12. Mathias Dewatripont & Jean Tirole, 1996. "Biased principals as a discipline device," ULB Institutional Repository 2013/9611, ULB -- Universite Libre de Bruxelles.
  13. Schumpeter, Joseph A., 1947. "The Creative Response in Economic History," The Journal of Economic History, Cambridge University Press, vol. 7(02), pages 149-159, November.
  14. Vahabi, Mehrdad, 2008. "From Walrasian general equilibrium to incomplete contracts : making sense of institutions," MPRA Paper 37887, University Library of Munich, Germany, revised 2002.
  15. J. Kornai, 2000. "Ten Years After "The Road to a Free Economy": The Author's Self-evaluation," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 12.
  16. János Kornai, 1998. "The System Paradigm," William Davidson Institute Working Papers Series 278, William Davidson Institute at the University of Michigan.
  17. Kornai, Janos & Weibull, Jorgen W., 1983. "Paternalism, buyers' and sellers' market," Mathematical Social Sciences, Elsevier, vol. 6(2), pages 153-169, November.
  18. Joshua Aizenman, 1990. "Soft Budget Constraints, Taxes, and the Incentive to Cooperate," NBER Working Papers 3561, National Bureau of Economic Research, Inc.
  19. J. Kornai, 1998. "Legal Obligation, Non-Compliance and Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 9.
  20. Bajt, A, 1991. " Irrelevance of the Soft Budget Constraint for the Shortage Phenomenon," Economic Change and Restructuring, Springer, vol. 24(1), pages 1-12.
  21. János Kornai, 2014. "The soft budget constraint," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 64(supplemen), pages 25-79, November.
  22. Becker, Gary S, 1983. "A Theory of Competition among Pressure Groups for Political Influence," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 371-400, August.
  23. Qian, Yingyi & Roland, Gérard, 1994. "Regional Decentralization and the Soft Budget Constraint: The Case of China," CEPR Discussion Papers 1013, C.E.P.R. Discussion Papers.
  24. Hillman, Arye L & Katz, Eliakim & Rosenberg, Jacob, 1987. "Workers as Insurance: Anticipated Government Assistance and Factor Demand," Oxford Economic Papers, Oxford University Press, vol. 39(4), pages 813-20, December.
  25. Magee, Karen L & Quandt, Richard E, 1994. " The Kornai Effect with Partial Bailouts and Taxes," Economic Change and Restructuring, Springer, vol. 27(1), pages 27-38.
  26. Herbert A. Simon, 1991. "Organizations and Markets," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 25-44, Spring.
  27. Begg, David & Portes, Richard, 1992. "Enterprise Debt and Economic Transformation: Financial Restructuring of the State Sector in Central and Eastern Europe," CEPR Discussion Papers 695, C.E.P.R. Discussion Papers.
  28. Kornai, Janos, 1998. "The Concept of the Soft Budget Constraint Syndrome in Economic Theory," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 11-17, March.
  29. Shleifer, Andrei & Vishny, Robert W, 1994. "Politicians and Firms," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 995-1025, November.
  30. Prell, Mark A., 1996. "The Two Kornai Effects," Journal of Comparative Economics, Elsevier, vol. 22(3), pages 267-276, June.
  31. Mark E. Schaffer, 1997. "Do Firms in Transition Economies have Soft Budget Constraints? A Reconsideration of the Concepts and Evidence," CERT Discussion Papers 9720, Centre for Economic Reform and Transformation, Heriot Watt University.
  32. Kornai, J, 1979. "Resource-Constrained versus Demand-Constrained Systems," Econometrica, Econometric Society, vol. 47(4), pages 801-19, July.
  33. Kornai, Janos, 2001. "Hardening the budget constraint: The experience of the post-socialist countries," European Economic Review, Elsevier, vol. 45(9), pages 1573-1599, October.
  34. Maskin, Eric S., 1996. "Theories of the soft budget-constraint," Japan and the World Economy, Elsevier, vol. 8(2), pages 125-133, June.
  35. Goldfeld, Stephen M. & Quandt, Richard E., 1993. "Uncertainty, bailouts, and the Kornai effect," Economics Letters, Elsevier, vol. 41(2), pages 113-119.
  36. Huang, Haizhou & Xu, Chenggang, 1998. "Soft Budget Constraint and the Optimal Choices of Research and Development Projects Financing," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 62-79, March.
  37. Chung, Tai-Yeong, 1991. "Incomplete Contracts, Specific Investments, and Risk Sharing," Review of Economic Studies, Wiley Blackwell, vol. 58(5), pages 1031-42, October.
  38. Maskin, Eric & Tirole, Jean, 1999. "Unforeseen Contingencies and Incomplete Contracts," Review of Economic Studies, Wiley Blackwell, vol. 66(1), pages 83-114, January.
  39. Kornai, Janos, 1992. "The Socialist System: The Political Economy of Communism," OUP Catalogue, Oxford University Press, number 9780198287766, March.
  40. Goldfeld, Stephen M. & Quandt, Richard E., 1990. "Output targets, the soft budget constraint and the firm under central planning," Journal of Economic Behavior & Organization, Elsevier, vol. 14(2), pages 205-222, October.
  41. Berglof, Erik & Roland, Gerard, 1998. "Soft Budget Constraints and Banking in Transition Economies," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 18-40, March.
  42. Vahabi, Mehrdad, 1998. "The Relevance of the Marshallian Concept of Normality in Interior and Inertial Dynamics as Revisited by Shackle and Kornai," Cambridge Journal of Economics, Oxford University Press, vol. 22(5), pages 547-72, September.
  43. Li, David D., 1998. "Insider control and the soft budget constraint: a simple theory," Economics Letters, Elsevier, vol. 61(3), pages 307-311, December.
  44. Baumol, William J, 1977. "Say's (at Least) Eight Laws, or What Say and James Mill May Really Have Meant," Economica, London School of Economics and Political Science, vol. 44(174), pages 145-61, May.
  45. Daniel C. Hardy, 1992. "Soft Budget Constraints, Firm Commitments, and the Social Safety Net," IMF Staff Papers, Palgrave Macmillan, vol. 39(2), pages 310-329, June.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ctl:louvre:2001024. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sebastien SCHILLINGS)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.