The Place of the Soft Budget Constraint Syndrome in Economic Theory

Abstract

The concept of the budget constraint, previously applied mainly to household decisions, was extended to enterprises and other organizations initially by Kornai for socialist economies. The more general phenomenon usually includes rent seeking, although not all rent-seeking behavior is associated with a soft budget constraint (SBC). Rather, SBC analysis is a theory of exit, or more precisely, of the demise of organizations. Moreover, the syndrome cannot be treated as a special case of the theory of regulation because not all price regulation softens the budget constraint. The SBC can emerge in nonregulated spheres, especially when financial interactions take place in vertical relationships between superiors and subordinates rather than in horizontal market conditions.