Soft Budget Constraint

Abstract

The concept of ‘soft budget constraint’ was first proposed by Janos Kornai to explain the pervasiveness of shortages under socialism. It has subsequently been understood mostly as a dynamic incentive problem whereby an investor would like to commit not to bail out an agent but ends up deciding on a bailout ex post . The concept has had a large number of applications in the transition literature but more broadly in economics as it can shed light on important episodes of bailouts.

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