Soft Budget Constraint and the Optimal Choices of Research and Development Projects Financing

Posted: 19 Aug 1998

See all articles by Haizhou Huang

Haizhou Huang

International Monetary Fund (IMF)

Chenggang Xu

University of Hong Kong

Abstract

Through analyzing the softness and hardness of budgeting constraints in research and development (R&D) investment under different institutions, we develop a theory of optimal R&D financing. Our theory not only provides a clear comparison of investment efficiency between centralized economies and market economies but also extends the analysis of soft budget constraints to firms in market economy. Based on this theory, we characterize optimal choices of R&D project financing in centralized and decentralized economies. Our results explain why some projects are financed internally by a large firm but others are cofinanced externally by several firms. We also explain what makes a centralized economy inefficient in R&D.

JEL Classification: P5, L14, G3, O3

Suggested Citation

Huang, Haizhou and Xu, Chenggang, Soft Budget Constraint and the Optimal Choices of Research and Development Projects Financing. Available at SSRN: https://ssrn.com/abstract=116011

Haizhou Huang (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Chenggang Xu

University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

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