Soft Budget Constraints and Banking in Transition Economies

JOURNAL OF COMPARATIVE ECONOMICS

Posted: 10 Jun 1998

See all articles by Erik Berglöf

Erik Berglöf

Institute of Global Affairs, London School of Economics and Political Science

Gérard Roland

University of California, Berkeley - Department of Economics; Centre for Economic Policy Research (CEPR)

Abstract

We analyze the problem of soft budget constraints of enterprises financed by banks in transition economies and review the similarities and the differences in various models addressing that issue. We reconstruct these models as several variants of a basic sequential model of soft budget constraints. In each case, we analyze both the sources of the soft budget constraint and the mechanisms for hardening budget constraints, including the policy implications of the analysis. Despite various mechanisms and channels for soft budget constraints, all models share the same sequential structure where soft budget constraints arise due to the endogenous lack of credibility for liquidation of a project instead of continuation and refinancing. All share the same feature that mechanisms for hardening are mechanisms for endogenously restoring such a credibility for liquidation.

JEL Classification: P5, G21, G3, H2, H81

Suggested Citation

Berglöf, Erik and Roland, Gérard, Soft Budget Constraints and Banking in Transition Economies. JOURNAL OF COMPARATIVE ECONOMICS, Available at SSRN: https://ssrn.com/abstract=66252

Erik Berglöf (Contact Author)

Institute of Global Affairs, London School of Economics and Political Science ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Gérard Roland

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-642-4321 (Phone)
510-642-6615 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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