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Subsidies, Soft Budget Constraints and Financial Market Imperfections

  • Emilio Colombo


    (Department of Economics, University of Milan-Bicocca)

  • Akos Valentinyi

    (University of Southampton & CEPR)

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.

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Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 50.

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Length: 24 pages
Date of creation: Feb 2002
Date of revision: Feb 2002
Handle: RePEc:mib:wpaper:50
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  1. Huang, H. & Xu, C., 2000. "Financial Institutions, Financial Contagion, and Financial Crises," Papers 21, Chicago - Graduate School of Business.
  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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