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Soft Budget Constraints, Transition, and Industrial Change

Mathias Dewatripont () and Gérard Roland ()

Journal of Institutional and Theoretical Economics (JITE), 2000, vol. 156, issue 1, 245-

Abstract: This paper surveys a number of contributions that deal with the "soft budget constraint problem," that is, the refinancing of loss-making enterprises. This problem is particularly prevalent in transition economies but is also pervasive in market economies. Following Dewatripont and Maskin [1995], the paper looks at soft budget constraints as dynamic commitment problems in the presence of sunk costs. Various ways to harden budget constraints are analyzed: privatization, demonopolization, decentralization of government, decentralization of credit, and banking reform. Finally, the paper looks at the role of budget constraints on risk taking and innovation.

JEL-codes: P20 P34 (search for similar items in EconPapers)
Date: 2000
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