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Politicians and soft budget constraints

  • Dalen, Dag Morten


    (BI Norwegian School of Management)

  • Moen, Espen R.

    (BI Norwegian School of Management)

  • Riis, Christian

    (BI Norwegian School of Management)

We study soft budget constraints from the perspective of political economics. A partly partisan government confronts a budget crisis in a politically important sector, e.g. like the health care sector. To what extent the government wants to make additional grants to the sector depends on economic conditions and on the preferences of the government, both unknown to the electorate. Thus, the government’s budget response gives a signal of its preferences, and may thereby influence the probability that the government is re-elected. As a result, the handeling of a budget crisis becomes inefficient even from an ex post point of view, in the sense that it does not react adequately to changing economic conditions.

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Paper provided by Oslo University, Health Economics Research Programme in its series HERO On line Working Paper Series with number 2001:2.

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Length: 17 pages
Date of creation: 30 Jun 2009
Date of revision:
Handle: RePEc:hhs:oslohe:2001_002
Contact details of provider: Postal: HERO / Institute of Health Management and Health Economics P.O. Box 1089 Blindern, N-0317 Oslo, Norway
Phone: 2307 5309
Fax: 2307 5310
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  1. Dewatripont, M & Maskin, E, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 541-55, October.
  2. János Kornai, 2014. "The soft budget constraint," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 64(supplemen), pages 25-79, November.
  3. Harrington, Joseph E, Jr, 1993. "Economic Policy, Economic Performance, and Elections," American Economic Review, American Economic Association, vol. 83(1), pages 27-42, March.
  4. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
  5. Schultz, Christian, 1996. "Polarization and Inefficient Policies," Review of Economic Studies, Wiley Blackwell, vol. 63(2), pages 331-44, April.
  6. Yingyi Qian & Gerard Roland, . "Federalism and the Soft Budget Constraint," Working Papers 97045, Stanford University, Department of Economics.
  7. Mariano Tommasi, 1995. "Why Does it Take a Nixon to go to China?," UCLA Economics Working Papers 728, UCLA Department of Economics.
  8. Swank, Otto H., 1998. "Towards an economic theory of party ideology," European Journal of Political Economy, Elsevier, vol. 14(2), pages 223-240, May.
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