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Soft budget constraints, transition, and financial systems

Mathias Dewatripont, Gérard Roland

Open publisher page 35 citations

Abstract

This paper surveys a number of contributions that deal with the "soft budget constraint problem," that is, the refinancing of loss-making enterprises. This problem is particularly prevalent in transition economies but is also pervasive in market economies. Following DEWATRIPONT AND MASKIN [1995], the paper looks at soft budget constraints as dynamic commitment problems in the presence of sunk costs. Various ways to harden budget constraints are analyzed: privatization, demonopolization, decentralization of government, decentralization of credit, and banking reform. Finally, the paper looks at the role of budget constraints on risk taking and innovation.

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What this paper is about

This paper surveys a number of contributions that deal with the "soft budget constraint problem," that is, the refinancing of loss-making enterprises. This problem is particularly prevalent in transition economies but is also pervasive in market economies. Following DEWATRIPONT AND MASKIN [1995], the paper looks at soft budget constraints as dynamic commitment problems in the presence of sunk costs. Various ways to harden budget constraints are analyzed: privatization, demonopolization, decentralization of government, decentralization of credit, and banking reform. Finally, the paper looks at the role of budget constraints on risk taking and innovation.

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OpenAlex reports 35 citations for this work. Citation counts describe recorded attention and do not establish research quality.

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Available abstract

This paper surveys a number of contributions that deal with the "soft budget constraint problem," that is, the refinancing of loss-making enterprises. This problem is particularly prevalent in transition economies but is also pervasive in market economies. Following DEWATRIPONT AND MASKIN [1995], the paper looks at soft budget constraints as dynamic commitment problems in the presence of sunk costs. Various ways to harden budget constraints are analyzed: privatization, demonopolization, decentralization of government, decentralization of credit, and banking reform. Finally, the paper looks at the role of budget constraints on risk taking and innovation.

Key concepts: Budget constraint, Decentralization, Constraint (computer-aided design), Government (linguistics), Government budget, Economics, Business, Finance

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