Investment, Credit Rationing, And The Soft Budget Constraint: Evidence From Czech Panel Data

Lubomir Lizal and Jan Svejnar

The Review of Economics and Statistics, 2002, vol. 84, issue 2, 353-370

Abstract: Strategic restructuring of firms through investment is key to a transition from plan to market. Using data on industrial firms in the Czech Republic during 1992-1998, we find that foreign-owned companies invest the most and cooperatives the least, that private firms do not invest more than state-owned ones, and that cooperatives and small firms are credit rationed. Given the large volume of nonperforming bank loans to firms and the high rate of investment of large state-owned and private firms, our findings also suggest that these firms operate under a soft budget constraint. Estimates of a dynamic model, together with the support for the neoclassical model, suggest that firms started to behave consistently with profit maximization. © 2002 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

Date: 2002
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