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A Theory of the Soft-Budget Constraint

Author

Listed:
  • Chong-en Bai

    (Boston College)

  • Yijiang Wang

    (University of Minnesota)

Abstract
This paper studies the soft budget constraint problem in a principal-agent model. The agent screens projects of and makes initial investment in the projects that have passed the screening. He then finds the types of the funded projects and decides to close some of the ex post inefficient ones among them. Closing projects sends an unfavorable signal about the agent's screening effort. Under the ex ante efficient contract, the agent has incentive to refinance some of the ex post inefficient projects.

Suggested Citation

  • Chong-en Bai & Yijiang Wang, 1995. "A Theory of the Soft-Budget Constraint," Boston College Working Papers in Economics 298., Boston College Department of Economics.
    • Handle: RePEc:boc:bocoec:298
    as

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    File URL: http://fmwww.bc.edu/EC-P/wp298.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Vahabi, Mehrdad, 2003. "La contrainte budgétaire lâche et la théorie économique [Soft Budget Constraint and Economic Theory]," MPRA Paper 17651, University Library of Munich, Germany.
    2. Mehrdad Vahabi, 2025. "The Soft Budget Constraint: A Theoretical Clarification," Palgrave Studies in the History of Economic Thought,, Palgrave Macmillan.
    3. Li, David D. & Liang, Minsong, 1998. "Causes of the Soft Budget Constraint: Evidence on Three Explanations," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 104-116, March.
    4. Li, David D., 1998. "Insider control and the soft budget constraint: a simple theory," Economics Letters, Elsevier, vol. 61(3), pages 307-311, December.

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    Keywords

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    JEL classification:

    • P51 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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