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Soft Budget Constraints and State Capitalism

Sergei Guriev ()

Acta Oeconomica, 2018, vol. 68, issue supplement1, 115-124

Abstract: I consider the application of János Kornai’s soft budget constraint (SBC) concept to the state capitalist economy. I argue that interaction of SBC with agency problems within the government bureaucracy helps explaining a major feature of state capitalism – failure to privatize underperforming state-owned enterprises (SOEs). Bureaucrats supervising the failing SOEs prefer to keep them afloat and gamble for resurrection; in contrast, privatization would involve recognizing the loss, which would result in acknowledging the bureaucrat’s failure that is disincentivized by the state. This endogenously emerging preferential treatment of state-owned firms creates a competitive advantage against private firms; this explains why in state capitalism privatization may result in lower rather than higher productivity and therefore remain unpopular.

Keywords: soft budget constraints; state capitalism; János Kornai (search for similar items in EconPapers)
JEL-codes: P12 P31 P51 (search for similar items in EconPapers)
Date: 2018
Note: The views presented here are those of the author and not necessarily of the EBRD.
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Handle: RePEc:aka:aoecon:v:68:y:2018:i:supplement1:p:115-124