A Theory of Shortage in Socialist Economies Based on the "Soft Budget Constraint."

Yingyi Qian

American Economic Review, 1994, vol. 84, issue 1, 145-56

Abstract: This paper attributes shortages of goods in socialist economies to the soft financial constraints that firms in such economies face. A 'soft budget constraint' problem arises when the state bank is unable to make a credible commitment not to refinance bad projects once some investment costs are sunk. In such a situation, if a consumer good is also demanded by firms as an input and the seller cannot separate firms from households, the high market-clearing price would lead to welfare losses because too many bad projects would start and crowd out household consumption. Copyright 1994 by American Economic Association.

Date: 1994
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