A Model of Budget Constraint and Enterprise Restructuring

Jihe Song and Shumei Gao

No 1, CERT Discussion Papers from Centre for Economic Reform and Transformation, Heriot Watt University

Abstract: This paper presents a managerial utility maximisation framework to investigate the impact of budget constraints on enterprise restructuring in transitional economies. Assuming that managerial effort is allocated between restructuring and subsidy seeking, and using non-linear programming technique, we have demonstrated that hardening budget constraint by reducing state subsidies to state firms have positive effects on managerial incentives towards enterprise restructuring. Our results apply both to the perfectly competitive case and the monopolistic case. We have, however, uncovered a perverse relationship between labour demand and wage rate.

JEL-codes: L20 P31 (search for similar items in EconPapers)
Date: 2000
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