Bureaucratic Control and the Soft Budget Constraint

Posted: 25 Aug 1998

See all articles by Chong-En Bai

Chong-En Bai

The University of Hong Kong - School of Economics and Finance; University of Michigan - William Davidson Institute

Yijiang Wang

University of Minnesota - Twin Cities - Carlson School of Management

Abstract

In the hierarchy of China's state sector, both before and during the current reform period, government bureaucrats select and supervise state-owned enterprise (SOE) managers. The incentive problem of SOE managers has been studied carefully, but that of the bureaucrats has not. This paper uses a model to show that the agency problem of the bureaucrat leads to the persistence of the soft-budget constraint (SBC) in the state sector. This suggests that the problem of SBC is unlikely to go away even when other familiar reasons contributing to the SBC disappear, e.g., concern about employment.

JEL Classification: P31, P21, P26, D8

Suggested Citation

Bai, Chong-En and Wang, Yijiang, Bureaucratic Control and the Soft Budget Constraint. Available at SSRN: https://ssrn.com/abstract=104361

Chong-En Bai (Contact Author)

The University of Hong Kong - School of Economics and Finance ( email )

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University of Michigan - William Davidson Institute ( email )

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Yijiang Wang

University of Minnesota - Twin Cities - Carlson School of Management ( email )

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United States
612-624-6814 (Phone)
612-624-8360 (Fax)

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