A Political Economy Theory of the Soft Budget Constraint

James Robinson and Ragnar Torvik

Working Paper Series from Department of Economics, Norwegian University of Science and Technology

Abstract: Why do soft budget constraints exist and persist? In this paper we argue that the prevalence of soft budget constraints can be best explained by the political desirability of softness. We develop a political economy model where politicians cannot commit to policies that are not ex post optimal. We show that because of the dynamic commitment problem inherent in the soft budget constraint, politicians can in essence commit to make transfers to entrepreneurs which otherwise they would not be able to do. This encourages such entrepreneurs to vote for them. Though the soft budget constraint may induce economic inefficiency, it may be politically rational because it influences the outcomes of elections. In consequence, even when information is complete, politicians may fund bad projects which they anticipate they will have to bail out in the future.

Keywords: Political Economy; Investment; Development (search for similar items in EconPapers)
JEL-codes: H20 H50 O20 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2005-08-06
New Economics Papers: this item is included in nep-pbe, nep-pol and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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http://www.svt.ntnu.no/iso/WP/2005/9softbudgetres.pdf (application/pdf)

Related works:
Journal Article: A political economy theory of the soft budget constraint (2009)
Working Paper: A Political Economy Theory of the Soft Budget Constraint (2006)
Working Paper: A Political Economy Theory of the Soft Budget Constraint (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:nst:samfok:5605

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