Soft Budget Constraints and State Capitalism

Sergei Guriev

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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)
Date: 2018-01
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Published in Acta Oeconomica, 2018, 68 (s1), pp.115-124. ⟨10.1556/032.2018.68.s.9⟩

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Journal Article: Soft Budget Constraints and State Capitalism (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:spmain:hal-03878647

DOI: 10.1556/032.2018.68.s.9

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