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Subsidies, Soft Budget Constraints and Financial Market Imperfections

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  • Emilio Colombo

    () (Department of Economics, University of Milan-Bicocca)

  • Akos Valentinyi

    (University of Southampton & CEPR)

Abstract

In this paper we analyze the interaction between subsidies, soft budget con- straints and financial market imperfections in a simple model of occupational choice. The basic message is that the e ect of soft budget constraints has to be analyzed jointly with other possible distortions that are affecting the economy. In particu- lar in environments where there are severe forms of financial market imperfections, subsidies and soft budget constraints can ease those imperfections and reduce credit rationing problems. The "positive" effect of soft budget constraints depends also upon the degree of institutional failure of the economy.

Suggested Citation

  • Emilio Colombo & Akos Valentinyi, 2002. "Subsidies, Soft Budget Constraints and Financial Market Imperfections," Working Papers 50, University of Milano-Bicocca, Department of Economics, revised Feb 2002.
  • Handle: RePEc:mib:wpaper:50
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    File URL: http://dems.unimib.it/repec/pdf/mibwpaper50.pdf
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    References listed on IDEAS

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    1. Haizhou Huang & Chenggang Xu, 1999. "Financial Institutions, Financial Contagion, and Financial Crises," CID Working Papers 21, Center for International Development at Harvard University.
    2. Simon Johnson & John McMillan & Christopher Woodruff, 1999. "Property Rights, Finance, and Entrepreneurship," CESifo Working Paper Series 212, CESifo Group Munich.
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