Soft Budget Constraints, Firm Commitments and the Social Safety Net
October 1, 1991
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Summary
It is shown that the inefficiencies created by the “soft” budget constraint, enjoyed by enterprises in Eastern Europe and elsewhere, will continue so long as governments are unable credibly to threaten not to bail out loss-makers. Commitment to a “hard” budget constraint can best be achieved by the institution of a suitable social safety net. The burden on the social safety net can be reduced by the (endogenous) development of financial markets.
Subject: Budget planning and preparation, Employment, Moral hazard, Social assistance spending, Unemployment
Keywords: constant returns to scale, present value, time horizon, WP
Pages:
26
Volume:
1991
DOI:
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Issue:
098
Series:
Working Paper No. 1991/098
Stock No:
WPIEA0981991
ISBN:
9781451949094
ISSN:
1018-5941
Notes
Also published in Staff Papers, Vol. 39, No. 2, June 1992.
