Does Protection Harden Budget Constraints?

Greetje Everaert and Hylke Vandenbussche

LICOS Discussion Papers from LICOS - Centre for Institutions and Economic Performance, KU Leuven

Abstract: In this paper we analyse the effects of soft budget constraints in an international context. Firstly, we show that soft budget constraints in an exporting country lead to higher levels of trade protection in the recipient country. Secondly, the model predicts that protectionist trade policy helps to harden budget softness in the exporting country. We therefore argue that, when industrial policy fails to enforce financial discipline, trade policy can take over this role. Finally, we discuss potential implications of our model for EU-policy with respect to Central and Eastern Countries.

Keywords: Soft Budget Constraints; Transition; Trade Policy; Oligopoly (search for similar items in EconPapers)
JEL-codes: F13 L13 P34 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2001
New Economics Papers: this item is included in nep-mfd and nep-tra
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:lic:licosd:9801

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