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The Soft Budget Constraint: A Theoretical Clarification

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  • Mehrdad Vahabi

    (ERASME - Recherche et analyse des sociétés Maghreb-Europe - UP8 - Université Paris 8 Vincennes-Saint-Denis)

Abstract

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.

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  • Mehrdad Vahabi, 2001. "The Soft Budget Constraint: A Theoretical Clarification," Post-Print hal-00629160, HAL.
  • Handle: RePEc:hal:journl:hal-00629160
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    Cited by:

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    3. Vahabi, Mehrdad, 2020. "نئولیبرالیسم و مقابله با تورم [The Neoliberalism and the Inflation Control]," MPRA Paper 102539, University Library of Munich, Germany.
    4. Mathilde Maurel & Thomas Pernet, 2021. "New evidence on the soft budget constraint: Chinese environmental policy effectiveness in SOE-dominated cities," Public Choice, Springer, vol. 187(1), pages 111-142, April.
    5. Peter J. Boettke & Rosolino A. Candela, 2021. "János Kornai, the Austrians, and the political and economic analysis of socialism," Public Choice, Springer, vol. 187(1), pages 85-97, April.
    6. Nikolay Nenovsky & E. Peev & T. Yalamov, 2003. "Banks-Firms Nexus under the Currency Board: Empirical Evidence from Bulgaria," Post-Print halshs-00259830, HAL.
    7. Mehrdad Vahabi, 2021. "Socialism and Kornai’s revolutionary perspective," Public Choice, Springer, vol. 187(1), pages 37-54, April.
    8. Eric Magnin & Nikolay Nenovsky, 2024. "Soft monetary constraint and shortage in the European sovereign debt economy," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 37(1), pages 55-80, March.
    9. Mehrdad Vahabi, 2018. "János Kornai and General Equilibrium Theory," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 68(supplemen), pages 27-52, January.
    10. Mehrdad Vahabi, 2021. "Introduction: a special issue in honoring Janos Kornai," Public Choice, Springer, vol. 187(1), pages 1-13, April.
    11. Mehrdad Vahabi, 2022. "In Janos Kornai’s memory," Public Choice, Springer, vol. 190(3), pages 265-271, March.
    12. Vahabi, Mehrdad, 2002. "The Soft Budget Constraint: An Institutionalist Approach," MPRA Paper 17649, University Library of Munich, Germany.

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    More about this item

    Keywords

    soft and hard budget constraints; Say's Principle; Walras's Law; contrainte budgétaire lâche et dure; principe de Say; la loi de Walras;
    All these keywords.

    JEL classification:

    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • P2 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies

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