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A Model of Budget Constraint and Enterprise Restructuring

  • Jihe Song
  • Shumei Gao
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    This paper presents a managerial utility maximisation framework to investigate the impact of budget constraints on enterprise restructuring in transitional economies. Assuming that managerial effort is allocated between restructuring and subsidy seeking, and using non-linear programming technique, we have demonstrated that hardening budget constraint by reducing state subsidies to state firms have positive effects on managerial incentives towards enterprise restructuring. Our results apply both to the perfectly competitive case and the monopolistic case. We have, however, uncovered a perverse relationship between labour demand and wage rate.

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    File URL: http://www.sml.hw.ac.uk/downloads/cert/wpa/2000/dp0001.pdf
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    Paper provided by Centre for Economic Reform and Transformation, Heriot Watt University in its series CERT Discussion Papers with number 0001.

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    Date of creation: 2000
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    Handle: RePEc:hwe:certdp:0001
    Contact details of provider: Postal: Edinburgh EH14 4AS
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    Web page: http://www.sml.hw.ac.uk/research/cert.htm

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    1. Shumei Gao and Mark E. Schaffer & Shumei Gao and Mark E. Schaffer, 1998. "Financial Discipline in the Enterprise Sector in Transition Countries: How Does China Compare?," William Davidson Institute Working Papers Series 124, William Davidson Institute at the University of Michigan.
    2. Schaffer, Mark E., 1989. "The credible-commitment problem in the center-enterprise relationship," Journal of Comparative Economics, Elsevier, vol. 13(3), pages 359-382, September.
    3. 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.
    4. János Kornai, 2014. "The soft budget constraint," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 64(supplemen), pages 25-79, November.
    5. Yingyi Qian & Gerard Roland, . "Federalism and the Soft Budget Constraint," Working Papers 97045, Stanford University, Department of Economics.
    6. Krueger, Anne O, 1974. "The Political Economy of the Rent-Seeking Society," American Economic Review, American Economic Association, vol. 64(3), pages 291-303, June.
    7. Milgrom, Paul R, 1988. "Employment Contracts, Influence Activities, and Efficient Organization Design," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 42-60, February.
    8. 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.
    9. 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.
    10. Estrin, Saul & Wright, Mike, 1999. "Corporate Governance in the Former Soviet Union: An Overview," Journal of Comparative Economics, Elsevier, vol. 27(3), pages 398-421, September.
    11. Aghion, Philippe & Blanchard, Olivier & Burgess, Robin, 1994. "The behaviour of state firms in eastern Europe, pre-privatisation," European Economic Review, Elsevier, vol. 38(6), pages 1327-1349, June.
    12. Boycko, Maxim & Shleifer, Andrei & Vishny, Robert W, 1996. "A Theory of Privatisation," Economic Journal, Royal Economic Society, vol. 106(435), pages 309-19, March.
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