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Both aristocratic privileges and constitutional constraints in traditional monarchies can be derived from a ruler's incentive to minimize expected costs of moral-hazard rents for high officials. We consider a dynamic moral-hazard model of governors serving a sovereign prince, who must deter them from rebellion and hidden corruption which could cause costly crises. To minimize costs, a governor's rewards for good performance should be deferred up to the maximal credit that the prince can be trusted to pay. In the long run, we find that high officials can become an entrenched aristocracy with low turnover and large claims on the ruler. Dismissals for bad performance should be randomized to avoid inciting rebellions, but the prince can profit from reselling vacant offices, and so his decisions to dismiss high officials require institutionalized monitoring. A soft budget constraint that forgives losses for low-credit governors can become efficient when costs of corruption are low.

This paper analyzes the efficiency of a set of environmental measures introduced by China’s 11th Five-Year Plan in 2006, using a rich and unique data set assembled from the Ministry of Environmental Protection and the State Environmental Protection Agency. By exploiting plausibly exogenous variation in regulatory stringency generated by the regulatory system across China’s provinces, we find evidence that pollution-intensive cities reduced their SO2 emissions substantially, whereas cities with a strong state-owned enterprise (SOE) presence did not. We interpret the results as pointing to evidence of Chinese SOEs’ ongoing soft budget constraints. The findings are robust to the inclusion of different fixed effects and other key determinants of pollution. Moreover, we investigate the main factors underlying regulatory non-compliance: the overlapping (or not) of “Two Control Zone” (Special Policy Zone, Coastal) cities wherein environmental (growth) policies are prioritized; the existence of turning points below (above) which growth and reductions in pollution substitute for (complement) each other; the size and extent of industrial concentration, which determines the possibilities of firms negotiating with the local authorities; and finally, the regulation-induced adoption of cleaner technologies by polluting firms, which enhance productivity and lower SO2 emissions.

Within the framework of the soft budget constraint problem, this article investigates the impact of a legislative reform that increased regional tax autonomy on the propensity of Spanish regional governments to incur a deficit. For this purpose, a dynamic panel data model is estimated, using data for the period 1984–2019. The sample shows a breakpoint in 2002, when the reform of the regional financing system came into force, providing Spanish regions with greater tax autonomy, more fiscal competency, and lower intergovernmental transfers. Results show that the budget constraint has hardened, as regions have fewer incentives to accumulate budgetary deficits with the expectation of future compensations from the central government. A comprehensive review of the evolution of other factors previously identified as determinants of soft budget constraints, and the analysis of two regions not included in this financing system, suggest no other possible explanation for these results.

Technological innovations are heterogeneous in nature; some are pioneering while others are not. Drawing on a series of theoretical studies, this paper offers empirical evidence on the differential effects of soft budget constraints on non-pioneering and pioneering innovations by using provincial-level data from China spanning from 2003 to 2015. Using a panel threshold model framework, we observe that soft budget constraints stimulate non-pioneering innovations but hinder pioneering innovations, with the hindering effects outweighing the stimulating effects. These findings underscore the importance of overcoming institutional path dependence and hardening budget constraints to foster the dynamic evolution of innovation modes.

The soft budget constraint (SBC) is over 40 years old and may seem too well known by now to need elucidation. In this paper, I discuss its origin and its causes. The concept of the soft budget constraint was coined by János Kornai, but the origin of the phenomenon that the term captures deserves discussion. Here, I ask why the SBC phenomenon came into being. Kornai considers it a manifestation of paternalism toward SOEs by superior bodies that refuse to let them go under due to symbiotic solidarity with their subordinates. I contend that there are stronger reasons, reasons that inhere in the very core of the bureaucratic allocation system—the method of material balances—that cannot allow enterprises to die just because they generate losses.

China has been held up as a modern-day exemplar of 'market-preserving federalism.' This article challenges this popular belief by showing that its local governments face soft budget constraints. Fiscal indiscipline among subnational governments, which risks national indebtedness and macroeconomic instability, can pose serious dangers to federations. A large body of literature which proposes solutions to fiscal indiscipline through electoral incentives and political party structure cannot be applied to China. The Chinese Communist Party's cadre-evaluation and dual accountability systems make it an imperative for local officials to augment fiscal revenue and allow them to tap resources at local credit institutions. This has resulted in mounting local government debt, the lion's share of which is unrepaid loans owed to local credit institutions. To harden budget constraints, political institutions need to be reconfigured to allow the central government more effectively to hold local authorities accountable for resources deployed in achieving their job-performance targets. La Chine est considérée comme un exemple moderne de « fédéralisme préservant le marché ». Cet article conteste cette croyance répandue en montrant que ses administrations locales sont soumises à des contraintes budgétaires souples. L'indiscipline fiscale des gouvernements subnationaux, qui fait risquer l'endettement national et l'instabilité macro-économique, peut présenter de sérieux dangers pour les fédérations. Une large littérature qui propose des solutions à l'indiscipline fiscale par des primes électorales et la structure des partis politiques ne peut pas être appliquée en Chine. L'évaluation cadre et les systèmes d'imputabilité doubles du Parti communiste chinois rendent impératif pour les fonctionnaires locaux d'augmenter le revenu fiscal et d'élargir leurs ressources auprès des établissements de crédit locaux. Ceci a abouti à une hausse de la dette des administrations locales, dont l'essentiel est constitué de prêts non remboursés aux établissements de crédit locaux. Pour durcir les contraintes budgétaires, les institutions politiques doivent être reconfigurées afin de permettre au gouvernement central de rendre plus efficacement les collectivités locales responsables des ressources déployées dans la réalisation de leurs objectifs de performance de travail. China suele ser considerada como un ejemplo contemporáneo de 'federalismo protector del mercado'. Este artículo cuestiona esta popular creencia constatando que los gobiernos locales están sujetos a restricciones presupuestarias 'blandas'. La falta de disciplina fiscal por parte de las administraciones sub-nacionales pone en riesgo la deuda soberana y la estabilidad macroeconómica haciendo peligrar, por consiguiente, las federaciones. Hay numerosos estudios que proponen soluciones a la indisciplina fiscal basadas en incentivos electorales y en la estructura de partidos políticos; sin embargo estas soluciones no son aplicables al caso de China. Así, el sistema de evaluación de equipos y el sistema dual de responsabilidad de rendir cuentas del Partido Comunista Chino obligan a los funcionarios de la administración local a aumentar los ingresos fiscales a la vez que les permite utilizar recursos de agencias de crédito locales. Como resultado, la deuda de las administraciones locales — consistente en su mayor parte de préstamos de agencias locales de crédito no devueltos — se ha ido incrementado. Para endurecer las restricciones presupuestarias, es necesario reconfigurar las instituciones políticas con el fin de facilitar al gobierno central una mayor efectividad en responsabilizar a las autoridades locales de los recursos utilizados para el cumplimiento de los objetivos marcados.

This paper examines the prices of basic staples in rural Mexico. We document that nonlinear pricing in the form of quantity discounts is common, that quantity discounts are sizable for basic staples, and that the well-known conditional cash transfer program Progresa has significantly increased quantity discounts, although the program, as documented in previous studies, has not affected unit prices on average. To account for these patterns, we propose a model of price discrimination that nests those of Maskin and Riley (1984) and Jullien (2000), in which consumers differ in their tastes and, because of subsistence constraints, in their ability to pay for a good. We show that under mild conditions, a model in which consumers face heterogeneous subsistence or budget constraints is equivalent to one in which consumers have access to heterogeneous outside options. We rely on known results to characterize the equilibrium price schedule, which is nonlinear in quantity. We analyze the effect of nonlinear pricing on market participation as well as the impact of a market-wide transfer, analogous to the Progresa one, when consumers are differentially constrained. We show that the model is structurally identified from data on prices and quantities from a single market under common assumptions. We estimate the model using data on three commonly consumed commodities from municipalities and localities in Mexico. Interestingly, we find that relative to linear pricing, nonlinear pricing is beneficial to a large number of households, including those consuming small quantities, mostly because of the higher degree of market participation that nonlinear pricing induces. We also show that the Progresa transfer has affected the slopes of the price schedules of the three commodities we study, which have become steeper as consistent with our model, leading to an increase in the intensity of price discrimination. Finally, we find that a reduced form of our model, in which the size of quantity discounts depends on the hazard rate of the distribution of quantities purchased in a village, accounts for the shift in price schedules induced by the program.

János Kornai developed soft budget constraint logic to explain the socialist world’s dysfunctional economies. We extend his logic to explain dysfunctional land reform in the developing world. International development organizations such as the World Bank provide support for land privatization to developing-country governments, softening their budget constraints. Softer budget constraints encourage developing-country governments to pursue land privatization even when its social value is negative. Kenya’s land reform program illustrates the soft budget constraint syndrome.

In a socialist economy, when a state-owned enterprise incurs losses, the government often provides it with additional funding, cuts in taxes, and offers other compensations. Coincidentally, the managers of an SOE also expect to receive financial assistance from the state. Such a phenomenon is called the soft budget constraint (SBC). The root of the SBC phenomenon is analyzed in a traditional Stalinist economy and in a transitional economy. The issues of viability and policy burdens will also arise in other economies. If the state attempts to accelerate the growth or avoid the demise of nonviable industries, the SBC is necessary for the survival of enterprises in those industries. South Korea's support of its chaebols in its drive to develop the heavy-machine and heavy-chemical industries in the 1970s is an eminent example for the first case, and the British government's protection of coal mines is a well-known example for the second case.

The term \"soft budget constraint\" (SBC), regularly employed in the literature on economic transition from socialism to capitalism, is considered and clarified, and the formal theoretical literature on SBC is surveyed. A useful conceptual apparatus for integrating research programs is laid out, one that is acceptable for those involved in studying and formulating policy for postsocialist economies as well as for the many theorists who have attempted a formal approach to modeling the SBC phenomenon. The SBC phenomenon is compared with other important issues of dynamic commitment in economic theory, and outstanding challenges for the SBC research program are considered. [PUBLICATION ABSTRACT]