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Soft budget constraint and the parastatal sector


  • Vahabi, Mehrdad


This paper explores the relevance of soft budget constraints (SBC) to development studies by examining the parastatal sector. The political ingredient of the SBC is discussed by focusing on two examples: 1) religious and military foundations in Iran; and 2) Fannie Mae and Freddie Mac. It presents two main findings. First, the SBC of the parastatal sector can be understood as the political economy of a predator state or state’s rent-seeking activity. Second, the state sector is more prone to the SBC compared with a decentralized competitive market, but it might be subject to a harder budget constraint in comparison with the parastatal sector.

Suggested Citation

  • Vahabi, Mehrdad, 2011. "Soft budget constraint and the parastatal sector," MPRA Paper 37926, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:37926

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    References listed on IDEAS

    1. Mehrdad Vahabi & Mohajer Nasser, 2011. "Islamic republic of Iran and Its Opposition," Post-Print hal-00629139, HAL.
    2. Guriev, Sergei & Makarov, Igor & Maurel, Mathilde, 2002. "Debt Overhang and Barter in Russia," Journal of Comparative Economics, Elsevier, vol. 30(4), pages 635-656, December.
    3. Mehrdad Vahabi, 2011. "Appropriation, violent enforcement, and transaction costs: a critical survey," Public Choice, Springer, vol. 147(1), pages 227-253, April.
    4. Kornai, J, 1979. "Resource-Constrained versus Demand-Constrained Systems," Econometrica, Econometric Society, vol. 47(4), pages 801-819, July.
    5. Daron Acemoglu & James A. Robinson, 2000. "Why Did the West Extend the Franchise? Democracy, Inequality, and Growth in Historical Perspective," The Quarterly Journal of Economics, Oxford University Press, vol. 115(4), pages 1167-1199.
    6. János Kornai, 2014. "The soft budget constraint," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 64(supplemen), pages 25-79, November.
    7. J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 12.
    8. Roger Congleton, 2009. "On the political economy of the financial crisis and bailout of 2008–2009," Public Choice, Springer, vol. 140(3), pages 287-317, September.
    9. Li, David D., 1998. "Insider control and the soft budget constraint: a simple theory," Economics Letters, Elsevier, vol. 61(3), pages 307-311, December.
    10. Wildasin, David E., 1997. "Externalities and bailouts : hard and soft budget constraints in intergovernmental fiscal relations," Policy Research Working Paper Series 1843, The World Bank.
    11. Kornai, Janos & Weibull, Jorgen W., 1983. "Paternalism, buyers' and sellers' market," Mathematical Social Sciences, Elsevier, vol. 6(2), pages 153-169, November.
    12. Kornai, Janos, 2001. "Hardening the budget constraint: The experience of the post-socialist countries," European Economic Review, Elsevier, vol. 45(9), pages 1573-1599, October.
    13. Scott, Chris, 1990. "Soft Budgets and Hard Rents: A Note," Economic Change and Restructuring, Springer, vol. 23(2), pages 117-127.
    14. Desai, Raj M. & Olofsgard, Anders, 2006. "The political advantage of soft budget constraints," European Journal of Political Economy, Elsevier, vol. 22(2), pages 370-387, June.
    15. Kornai, Janos, 1992. "The Socialist System: The Political Economy of Communism," OUP Catalogue, Oxford University Press, number 9780198287766.
    16. Mehrdad Vahabi, 2014. "Soft Budget Constraint Reconsidered," Bulletin of Economic Research, Wiley Blackwell, vol. 66(1), pages 1-19, January.
    17. Vahabi, Mehrdad, 2006. "Ordres contradictoires et coordination destructive: le malaise iranien
      [Contradictory orders and detructive coordination: the Iranian disease]
      ," MPRA Paper 13235, University Library of Munich, Germany, revised Sep 2008.
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    Cited by:

    1. János Kornai, 2014. "The soft budget constraint," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 64(supplemen), pages 25-79, November.
    2. Kornai, János, 2014. "Bevezetés A puha költségvetési korlát című kötethez
      [Introduction to the author s volume entitled Soft Budget Constraint]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 845-897.

    More about this item


    soft and hard budget constraints; parastatal sector; predatory state; religious and military Foundations;

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H83 - Public Economics - - Miscellaneous Issues - - - Public Administration
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E11 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Marxian; Sraffian; Kaleckian
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles

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