SOFT BUDGET CONSTRAINT RECONSIDERED

Authors

  • Mehrdad Vahabi

    Corresponding author
    1. University of Paris 8, France
    • Correspondence: Associate Professor in Economics, Université Paris 8, Department d’Economie et Gestion, 2 rue de la Liberté, 93526 Saint-Denis Cedex, Tel: 33(0)1 43 61 24 64; Email: mehrdad.vahabi@wanadoo.fr.

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  • I would like to thank three anonymous referees for their valuable comments and Sylvie Lupton and Mandana Vahabi for their inspiring and insightful remarks on different parts of the paper. Obviously, all the remaining errors are mine.

ABSTRACT

This paper demonstrates that Kornai's original concept of the soft budget constraint (SBC) as a theoretical innovation in micro-theory disguises income redistributions that are essentially macroeconomic relationships. The SBC also postulates a competitive market economy as the benchmark of hard budget constraint (HBC) and efficiency. A recent formal theory explains the SBC as a component of profit-maximizing strategic behaviour. From this perspective, the SBC can be integrated into the new microeconomics, but it loses its specific institutional connotation and its macroeconomic dimension. The SBC is thus included in ubiquitous market-type relationships, particularly complete (optimal) contractual arrangements.

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