The soft budget constraint

Abstract

The author’s ideas on the soft budget constraint (SBC) were first expressed in 1976. Much progress has been made in understanding the problem over the ensuing four decades. The study takes issue with those who confine the concept to the process of bailing out loss-making socialist firms. It shows how the syndrome can appear in various organizations and forms in many spheres of the economy and points to the various means available for financial rescue. Single bailouts do not as such generate the SBC syndrome. It develops where the SBC becomes built into expectations. Special heed is paid to features generated by the syndrome in rescuer and rescuee organizations. The study reports on the spread of the syndrome in various periods of the socialist and the capitalist system, in various sectors. The author expresses his views on normative questions and on therapies against the harmful effects. He deals first with actual practice, then places the theory of the SBC in the sphere of ideas and models, showing how it relates to other theoretical trends, including institutional and behavioural economics and theories of moral hazard and inconsistency in time. He shows how far the intellectual apparatus of the SBC has spread in theoretical literature and where it has reached in the process of “canonization” by the economics profession. Finally, he reviews the main research tasks ahead.

Rent-Seeking in Elite Networks

“…We find that the difference in ROL comes from excess continuation of distressed firms by in-group banks. In other words, the lower ROL is an outcome of the soft budget constraint problem (Kornai 1986). This effect can be seen from Panel A of Figure 4, which plots the share of loans from in-group banks in total firm loans as firms approach bankruptcy.…”

Locked-in post-socialism: rolling path dependencies in Liberec’s district heating system

“…Poor construction standards and the lack of maintenance increased operation costs while leading to high-energy losses in the distribution networks. The system's blanket coverage of socialist consumers under soft budget constraints (Kornai 1986) -including both subsidized energy prices and the tolerance of poor financial management within companies -was challenged by the economic conditions that characterized liberalized markets, as well as the installation of individual meters. also, the customer base of dh plants began to shrink due to the emergence of more affordable and convenient heat supply options.…”

The institutional matrices theory as the basis of explanation of real estate bubble

“…Second, the budget constraint is a constraint on ex ante variables and firstly on demand. It is determined by expectation concerning future financial position when the actual spending will occur [30].…”

“…J. Kornai presented for socialist firms different ways and means of softening the budget constraint. There were divided into four groups: soft subsidies granted by national or local governments, soft taxation, soft credit and soft administrative prices [30].…”

“…Soft administrative prices could be applied in the situation, when the price is not set by a free contract between seller and buyer, but by some bureaucratic organization. The administrative price is hard if, once set, it restricts expenditure and does not automatically adjust to cost rises [30].…”