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Does Protection Harden Budget Constraints?

  • Greetje Everaert
  • Hylke Vandenbussche

In this paper we analyse the effects of soft budget constraints in an international context. Firstly, we show that soft budget constraints in an exporting country lead to higher levels of trade protection in the recipient country. Secondly, the model predicts that protectionist trade policy helps to harden budget softness in the exporting country. We therefore argue that, when industrial policy fails to enforce financial discipline, trade policy can take over this role. Finally, we discuss potential implications of our model for EU-policy with respect to Central and Eastern Countries.

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Paper provided by LICOS - Centre for Institutions and Economic Performance, KU Leuven in its series LICOS Discussion Papers with number 9801.

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Length: 36 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:lic:licosd:9801
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