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The Soft Budget Constraint: A Theoretical Clarification

Published online by Cambridge University Press:  17 August 2016

Mehrdad Vahabi
Mehrdad Vahabi*
Affiliation:
EPEH-LED, UniversitéParis 8
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Summary

In this paper, we have distinguished three different conceptions of the budget constraint (BC). The first one, introduced by Clower, regards the BC as a universal (unconditional) rational planning postulate. This does not imply market equilibrium or optimality. The second one, advocated by Kornai, considers the BC as a conditional empirical fact regarding the specific behavioural regularity of agents that is determined by particular institutional setups. The third one is implicitly held by a number of endogenous explanations of the SBC notably by the Complete (optimal) Contracts Theory and the Public Choice Theory. It regards the BC as a matter of choice by rational agents. While Clower and Kornai try to understand the BC in the context of disequilibrium or at least independently of equilibrium or optimality conditions, the partisans of the third approach integrate the BC in the process of dynamic optimization. Although Kornai’s conception of the BC is irreconcilable with the third approach, it should be noted that Kornai’s standpoint is contradictory. In his appraisal of the hard budget constraint (HBC) in case of competitive market economy, Kornai contends that the application of the BC is equivalent to the realization of Walras’ Law. He then uses this ideal HBC as a normative reference in order to measure the inefficiencies of the soft budget constraint (SBC). In fact, Kornai’s standpoint with regard to the HBC and his efficiency analysis are in tune with the third approach.

Résumé

Résumé

Dans ce papier, nous distinguons trois conceptions différentes de la contrainte budgétaire (CB). La première conception, formulée par Clower, considère la CB comme un postulat universel (non conditionnel) de planification rationnel par les agents. Ceci n’implique ni l’équilibre, ni l’optimalité. La seconde conception, soutenue par Kornai, interprète la CB comme un fait empirique conditionnel portant sur la spécificité de la régularité comportementale des agents, qui est déterminée par les matrices institutionnelles spécifiques. La troisième conception est sous jacente dans les explications endogènes de la contrainte budgétaire lâche (CBL) développée notamment par la théorie des Contrats Complets et la théorie du Choix Public. Celles- ci traitent de la CB comme une question de choix par les agents rationnels et optimisateurs. Tandis que Clower et Kornai essaient de comprendre la CB dans le cadre du déséquilibre ou au moins indépendamment des conditions de l’équilibre et de l’optimalité, les partisans de la troisième approche intègre la CB dans le processus de l’optimisation dynamique. Nonobstant les différences fondamentales de la conception de Kornai avec la troisième approche, sa vision est contradictoire. Dans son traitement de la contrainte budgétaire dure (CBD) dans une économie de marché concurrentielle, Kornai soutient que l’application de la CB implique la réalisation de la loi de Walras. Puis, il utilise cette CBD comme un cadre de référence normatif afin de mesurer les inefficacités de la CBL. En fait, la position de Kornai concernant la CBD et son analyse en terme d’efficacité sont en résonance avec la troisième approche.

Keywords

soft and hard budget constraintsrationality postulateoptimizationD5L2P2D5L2P2
Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 67 , Issue 2 , 2001 , pp. 157 - 195
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 2001 

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Footnotes

*

EPEH-LED, Université Paris 8, Saint-Denis, 2 rue de la Liberté, 93200 Saint-Denis, France. Comments from Bernard Chavance, Robert Clower, Christophe Defeuilley, Janos Kornai and two anonymous referees are gratefully acknowledged. All remaining errors are the author’s. The author would like to thank Mandana Vahabi without whose usual assistance this paper could not be prepared in the present form.

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