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Do Firms in Transition Economies have Soft Budget Constraints? A Reconsideration of the Concepts and Evidence

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  • Mark E. Schaffer

Abstract

This paper first examines various definitions of Kornai's soft budget constraint (SBC) and the difficulties involved in interpreting data on losses, subsidies and financing, and then considers selective evidence from transition economies. Stocks of overdue trade credit are no larger than in Western economies and firms in transition economies (TEs) typically impose hard budget constraints on each other. Banks have not been a systematic source of SBCs as often as is sometimes argued on the basis of data on classified loans; in 1992 Hungarian banks were imposing hard budget constraints on firms at the same time that they were classifying large volumes of their loans as bad. Tax arrears have emerged as a major source, and in the rapidly reforming TEs, the major source, of SBC's.

Suggested Citation

  • 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.
  • Handle: RePEc:hwe:certdp:9720
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    More about this item

    Keywords

    soft budget constraint; transition economies; trade credit; bad debt; tax arrears.;
    All these keywords.

    JEL classification:

    • P31 - Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions
    • P34 - Economic Systems - - Socialist Institutions and Their Transitions - - - Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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