Kornai: The Soft Budget Constraint

From the Introduction:

I first expressed my thoughts on the soft budget constraint in a lecture series I gave at Stockholm University in 1976. Two years later came my first publication to deal with it (along with other matters). That piece appears in this volume as Chapter 1. Almost four decades have passed since the idea was conceived, and during that time, all those of us who have dealt with the problem have advanced in understanding it. The introduction to this volume sums up how I interpret the soft budget constraint today, in 2014, and reviews the research done into explaining and analyzing it.

The syndrome

I have taken the expression syndrome from medicine, to mean the set of symptoms – recognizable, observable phenomena – absent from an ideally healthy organism. There can be one or more causes for such a set of symptoms to develop.

Medical science strives to find causes, but clinical practice must set about treating the syndrome even if the causes are still not sufficiently understood.2 In living organisms, a syndrome will usually appear in several variants: here one, here another symptom or group of symptoms will appear more strongly, while others are less apparent or fail to appear at all.

Economists make only sporadic use of the expression syndrome, apt though it is for describing some phenomena in economic organisms. Although it is not customary to refer to the crisis syndrome of the capitalist economy, for example, I gladly do so. There are many kinds of crisis with many kinds of symptoms and many kinds of factor to explain their development. Yet they have something in common: all the various types of crisis frequently appear bundled together.

That is the sense in which I use the expression soft budget constraint (SBC) syndrome in what follows.

The phenomenon

The major common feature of the many variants of the SBC syndrome is as follows: the behavior of every organization concerned is affected by the expectation that it will be bailed out if it gets into serious financial trouble. Each of the expressions in this basic interpretation calls for more detailed explanation.

There are many types of budget-constrained organization in whose behavior the SBC syndrome may appear: households, firms, non-governmental organizations (NGOs), investment projects not tied to a for-profit enterprise, distinct local government organizations (LGOs) within the apparatus of state, or other publicly funded institutions, and finally, central government on a national level. Initially SBC researches were centered on the enterprise sphere, but they later spread to organizations of other types.

 

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