The Soft Budget Constraint. An introductory study to volume IV of the Life’s Work series

Kornai, János (2014) The Soft Budget Constraint. An introductory study to volume IV of the Life’s Work series. Acta Oeconomica, 64 (S1). pp. 25-79. DOI 10.1556/AOecon.64.2014.S1.2

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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.

Item Type:Article
Uncontrolled Keywords:soft budget constraint, bail-out, loss-making enterprise, moral hazard, time inconsistency
JEL classification:B52 - Current Heterodox Approaches: Institutional; Evolutionary
D03 - Behavioral Microeconomics: Underlying Principles
D21 - Firm Behavior: Theory
H20 - Taxation, Subsidies, and Revenue: General
ID Code:1770
Deposited By: Ádám Hoffmann
Deposited On:19 Dec 2014 08:43
Last Modified:19 Dec 2014 08:43

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