Hard Budget Constraints Research Articles

A bankszabályozás lehetőségei és korlátai az endogén pénzelmélet keretében

The article questions whether the current system of bank regulation can guarantee that banks are subject to a hard budget constraint. We use the framework of post-­Keynesian endogenous money theory. Banks deposit loans in companies’ bank accounts, and no external source is needed for the transaction, so banks can in principle create an unlimited amount of money if there is a demand for credit. However, banks’ ability to create money is limited by a number of factors. Using János Kornai’s concept of a soft budget constraint we analyze the factors that cause inherently soft budget constraints for banks. We point out that neither monetary policy, nor the profit goals of banks, nor the banks’ internal risk management practices would guarantee that banks face a hard budget constraint. This must be imposed on them by an external factor, the banking regulation. However, the current system of banking regulation is not well suited to do this, so the soft budget constraint is inherent to banking. This contributes to the fact that banking crises are natural part of the financial system.

Hard talk, costly walk: The evolution of a soft budget constraint syndrome in a football club at the periphery of Europe.

A football club is exposed to a soft budget constraint (SBC) syndrome if it still survives after finding it impossible to break even financially in the long run. This in-depth case study presents a historical analysis of the evolution of an SBC syndrome in a top-tier Arctic football club over 30 years using public archive data. In oral speeches, strategy documents, and other official situations, the hierarchy at the club emphasized the importance of operating in a financially sustainable manner, that is, complying with a hard budget constraint approach (HBC). The club went along this path during the first years after entering the top tier in the mid-1980s. This was made possible by a team of low-cost local players. However, in line with increased media and sponsorship revenues in the 1990s, the economic threshold for competing at the top-level rose. Thus, during the last two decades of the club's financial history, the budget constraint (BC) approach softened. Primarily, a distant benefactor and capital injections from a joint-stock company owned mainly by the local bank and local energy company funded the overspending. Furthermore, the study uncovers how a soft financial control and monitoring system introduced by the national football association failed to emancipate the club from the SBC syndrome. The study finally suggests some measures that can eventually harden the BC at this as well as many other financially struggling European football clubs.

The soft budget constraint in action: German third tier professional football during the COVID19 pandemic

ABSTRACT Rationale The paper examines whether the concept of the soft budget constraint (SBC) helps understanding how lower tier football coped with the revenue drop during the COVID19. Design A qualitative research design relying on expert interviews and document analyses was employed. A sample of five clubs was examined using process-tracing methods. Findings Overspending and debt-making are persistent features of German lower tier football. Before the pandemic, clubs benefitted from distinct bail-outs. The revenue drop during the pandemic was primarily compensated by public subsidies; clubs also got money injections from fans, sponsors and investors. Yet, shareholder structure matters for the likelihood that clubs faced hard budget constraints. Practical implications The system of promotion and relegation facilitates overspending and debt-making. The specific corporate of German football clubs encourages moral hazard and creates hold-up risks. The public seems to have become more hesitant to grant bail-outs. Research contribution The concept of the soft budget constraint is instructive for understanding the specific economics of European football but its limits have to clearer specified.

Hard budget constraints and artificial intelligence technology

Motivated by the contradiction between a government's hard budget constraints and artificial intelligence, this study constructs a computable general equilibrium model embedded with various fiscal and tax policies to study the impact of artificial intelligence development on the Chinese economy under government budget constraints with different intensities. This paper seeks to find a reasonable policy that takes into account China's employment, income distribution, and budget constraints to achieve common prosperity. It finds that the softer the government's budget constraints, the smaller the negative impact of artificial intelligence on the economy. More specifically, allowing the government to increase its debts and spending is more effective than tax cuts. It is suggested that if the goal is to reconcile the contradiction between hard budget constraints and artificial intelligence, fiscal and tax policy combinations, together with an improvised soft budget constraint, are required to increase the taxation of capital to an appropriate degree. In order to resolve the contradiction between the government's hard budget constraints and the development of artificial intelligence in pursuit of common prosperity, a robot tax should be levied and automation capital taxed.

Coordination optimisation of energy and manufacturing flow for industry integrated energy system

With the breaking down of information barriers between energy flow with manufacturing flow, the coordination between them is an effective way to relieve the dual pressure from energy and environment industrial integrated energy system. The authors develop a scenario-based coordination model for energy flow and manufacturing flow to make full use of the flexibilities of energy supply and production process to reduce energy cost. To capture the flexibility in the energy flow, the authors enhance an electricity-steam-product gas–gas storage coupling energy flow model considering multi-uncertainties. The authors also develop a batch process model to formulate the flexibility in the production process. Based on the batch energy consumption constraints, the energy flow model and the batch process model are integrated as a coordination model. To ensure the feasibility of hard budget constraints under all possible random realisations, we add all-scenario-feasibility robust constraints which are infinite-dimensional constraints into the model. To solve the model, a vertex scenario set based on the characteristics of convex optimisation is constructed to equivalently convert infinite-dimensional constraints to finite-dimensional constraints. In this way, the coordination model is transformed to a mixed integer linear programming and can be solved using CPLEX. Finally, numerical test based on a real iron and steel plant is analysed. The results show that coordination between energy with manufacturing flow is effective to reduce the energy cost and carbon emission. Compare with only optimising energy flow, the coordination model can reduce total cost about 221.6 thousand RMB and 304.44t coal every day.

The Impact of Hard Budget Constraints on Economic Development

The Impact of Hard Budget Constraints on Economic Development

Budget-Feasible Mechanism Design for Non-monotone Submodular Objectives: Offline and Online

The framework of budget-feasible mechanism design studies procurement auctions where the auctioneer (buyer) aims to maximize his valuation function subject to a hard budget constraint. We study the problem of designing truthful mechanisms that have good approximation guarantees and never pay the participating agents (sellers) more than the budget. We focus on the case of general (non-monotone) submodular valuation functions and derive the first truthful, budget-feasible, and O(1)-approximation mechanisms that run in polynomial time in the value query model, for both offline and online auctions. Prior to our work, the only O(1)-approximation mechanism known for non-monotone submodular objectives required an exponential number of value queries. At the heart of our approach lies a novel greedy algorithm for non-monotone submodular maximization under a knapsack constraint. Our algorithm builds two candidate solutions simultaneously (to achieve a good approximation), yet ensures that agents cannot jump from one solution to the other (to implicitly enforce truthfulness). The fact that in our mechanism the agents are not ordered according to their marginal value per cost allows us to appropriately adapt these ideas to the online setting as well. To further illustrate the applicability of our approach, we also consider the case where additional feasibility constraints are present, for example, at most k agents can be selected. We obtain O(p)-approximation mechanisms for both monotone and non-monotone submodular objectives, when the feasible solutions are independent sets of a p-system. With the exception of additive valuation functions, no mechanisms were known for this setting prior to our work. Finally, we provide lower bounds suggesting that, when one cares about nontrivial approximation guarantees in polynomial time, our results are, asymptotically, the best possible.

ЯНОШ КОРНАЇ ТА ЙОГО ПАМ'ЯТНА ТВОРЧІСТЬ

Янош Корнаї – найвидатніший економіст соціалістичних і постсоціалістичних країн за останні 50 років. Він був всесвітньо відомим ученим, який залишив по собі величезну спадщину праць, опублікованих більш як 20 мовами. Його теорія системної нерівноваги в централізовано плановій економіці, концепція жорстких і м'яких бюджетних обмежень та економічного дефіциту мали революційне значення для наукового тлумачення процесів виробництва, розподілу і нагромадження капіталу в державних соціалістичних економіках. Особливо вагомим був його внесок у політичну економію соціалізму, курс якої він викладав у Гарвардському університеті. При аналізі соціалістичної системи Корнаї, по суті, задовольнявся описовим підходом, тоді як у працях, опублікованих після 1989 р., він акцентував увагу на нормативній економіці, пропонуючи напрями структурної реформи, інституційного будівництва і економічної політики в перехідному постсоціалістичному періоді. Велике значення має його остання книга, в якій порівнюється нерівновага, що характеризується дефіцитами при соціалізмі, з нерівновагою, характерною для надлишків при капіталізмі.Проаналізовано еволюцію теоретичної думки цього видатного економіста та її вплив на реальні економічні процеси. Надано полемічних коментарів щодо інтерпретації економічних і соціальних процесів, які відбуваються в Китаї.

Janos Kornai and his memorable work

ABSTRACT Janos Kornai was the most outstanding economist from the socialist and post-socialist region in the last 50 years. He was a world-renowned scholar who left behind an immense legacy of works published in over 20 languages. His theory of systemic disequilibrium in a centrally planned economy, the concept of hard and soft budget constraints, and economic shortage were of revolutionary importance to the scientific interpretation of the processes of production, distribution and capital accumulation in state socialist economies. Also of note is the author’s work on political economy of socialism, which he taught at the Harvard University. When analysing the socialist system, Kornai essentially contented himself with a descriptive approach, whereas in works published after 1989 he focused his attention on normative economics, suggesting directions of structural reform, institution-building, and economic policy in post-socialist transition. Also of great importance is Kornai’s last book comparing the disequilibrium characterised by shortage in socialism with the disequilibrium typical of the surplus in capitalism. This article analyses the evolution of this outstanding economist’s theoretical thought and its impact on real economic processes.

János Kornai and his memorable work

János Kornai was the most outstanding economist of socialist and postsocialist countries in the last fifty years. He was a world-renowned scholar who left behind an immense legacy of works published in over twenty languages. His theory of systemic disequilibrium in a centrally planned economy, concept of hard and soft budget constraints and the economics of shortage were of revolutionary importance to the scientific interpretation of the processes of production, distribution and capital accumulation in state socialist economies. Also of note is the author’s work on political economy of socialism, which he taught at the Harvard University. When analysing the socialist system Kornai essentially contented himself with a descriptive approach, whereas in works published post-1989 he focused his attention on normative economics suggesting directions of structural reform, institution-building and economic policy in post-socialist transition. Of great importance is also Kornai’s last book comparing the disequilibrium characterised by shortage in socialism with the disequilibrium typical of the surplus in capitalism. The article analyses the evolution of this outstanding economist’s theoretical thought and its impact on real economic processes. Polemic comments are also made on the interpretation of economic and social processes taking place in China.

Workforce size adjustment as a strategic response to exchange rate shocks: A strategy-tripod application to Chinese firms

How firms use workforce size adjustment as a strategic response to external shocks such as exchange-rate fluctuations is an important but not yet fully understood topic. To address the void in the literature, we apply the strategy tripod theoretical framework, which sees the external shocks as an industrial impact, the budget constraint as an institutional force, and the firm leverage as an organisational capability to examine the firms’ strategic response in terms of workforce size adjustment in the Chinese economy context. Based on longitudinal data of Chinese manufacturing firms, our analysis finds that facing exchange rate shocks, firms with hard budget constraint are more responsive in adjusting their workforce than firms with soft budget constraint. Furthermore, highly levered firms, with hard budget constraint, will adjust their workforce more aggressively than firms with less debt in their financial structure.

Mathematical Models for Implementation of the Concept of Hard budget Restrictions in the budgetary system

The subject of the study is the processes of budget decentralization in the management of public finances, as well as mathematical methods and models for implementing the concept of hard budget restrictions in order to create conditions for the self-development of administrative-territorial units. The aim of the study is to develop adaptive economic and mathematical models for implementing the strategy of hard budget constraints implemented in the process of inter-budget regulation. The relevance of the study is due to the fact that currently the subject of acute discussion in the scientific community is the self-development of administrative-territorial entities and increasing their financial independence. In this regard, the focus of economic research is focused on the problems of budgetary decentralization as an engine of economic development, as well as the related topics of the use of mathematical tools for modeling decision support in this area. The created models are subject to the requirements of learnability, adaptability to changing conditions of environmental influences, and the ability to operate not only with quantitative, but also with qualitatively defined characteristics. The problem of mathematical modeling is solved by applying an interdisciplinary synthesis of the theories of stochastic automata operating in random environments and fuzzy logic. The proposed synthesis of theoretical and methodological devices is the novelty of the research. As a result , an economic and mathematical model of a fuzzy automaton is constructed for determining and quantifying the values of the norms for the distribution of tax revenues between budgets of different levels of the budget system. A fuzzy automaton interacts with a simulation model that reproduces budget flows and quantifies the decisions made by the automaton model. The practical significance of the research results lies in the program implementation of the developed models and their inclusion in the public finance management circuit. In the future , it is planned to create a mathematical model of the collective behavior of fuzzy automata models, the interaction of which solves the problem of coordinating the interests of budgets of different levels of the hierarchy in the distribution of tax revenues.

Fiscal decentralization and the default risk of Chinese local government debts

AbstractThis paper examines the effects of fiscal decentralization on the default risk of Chinese local government debts based on data from both urban construction investment bonds and local government bonds. The empirical evidence indicates that while fiscal revenue decentralization tends to mitigate the default risk of local government debts, fiscal expenditure decentralization increases it. Four policy measures, namely, fiscal transparency, hard budget constraints, debt quotas, and local officials' ability to manage debt are also introduced to investigate how they affect the influence of fiscal decentralization on Chinese local government debt risk.

János Kornai, the Austrians, and the political and economic analysis of socialism

What is the relationship between central planning, pervasive shortages, and soft budget constraints under socialism? In this paper, we address this question by exploring the evolution of Janos Kornai’s work on the operation of real-world socialism. In doing so, our goal is to reframe Kornai’s contributions to the political economy of socialism by focusing on the epistemic conditions under non-market decision making. From this perspective, we argue that the dysfunction facing socialist economies is not one based fundamentally on a misalignment of incentives in enforcing hard budget constraints and eliminating shortages. Rather, soft budget constraints are a consequence of competition between firms in a non-profit setting, utilized as a means to monetize the control over state-owned resources through the creation of pervasive shortages.

Long-term efficiency of public service provision in a context of budget restrictions. An application to the education sector

This paper proposes an extension of the non-parametric long-term evaluation of efficiency, the conditional panel data DEA model, which takes into account the panel structure of the data and, at the same time, incorporates the role of contextual factors in the estimations. Its application to the education sector for the period analyzed (2009–2014) shows the utility of this method, since it obtains more representative efficiency scores for the complete time-period, is more robust to external shocks, and allows improvements to the decision-making process in the allocation of the budget available for the public education sector. The results are clear and present an evolution towards the convergence of the efficiency scores, precisely in a time period when hard budget constraints severely reduced the resources available for public schools.

János Kornai, the Austrians, and the Political and Economic Analysis of Socialism

What is the relationship between central planning, pervasive shortages, and soft budget constraints under socialism? In this paper, we address this question by exploring the evolution of Janos Kornai’s work on the operation of real-world socialism. In doing so, our goal is to reframe Kornai’s contributions to the political economy of socialism by focusing on the epistemic conditions under non-market decision making. From this perspective, we argue that the dysfunction facing socialist economies is not one of based fundamentally on a misalignment of incentives in enforcing hard budget constraints and eliminating shortages. Rather, soft budget constraints are a consequence of competition between firms in a non-profit setting, utilized as a means to monetize the control over state-owned resources through the creation of pervasive shortages.

Financing Costs and the Efficiency of Public-Private Partnerships

The paper compares provision of public infrastructure via public-private partnerships (PPPs) with provision under government management. Due to soft budget constraints of government management, PPPs exert more effort and therefore have a cost advantage in building infrastructure. At the same time, hard budget constraints for PPPs introduce a bankruptcy risk and bankruptcy costs. Consequently, if bankruptcy costs are high, PPPs may be less efficient than public management, although this does not result from PPPs' higher interest costs.

Indian fiscal federalism: a study of factors affecting resource position of the state governments

The finances of state governments in India have been facing a hard budget constraint as there is a legislative mandate to run the finances with a ceiling on fiscal deficit at 3% of gross state domestic product (GSDP) and the debt-to-GSDP ratio at 20%. In this paper, we have elucidated the limitations of fiscal deficit as the sole target, particularly in the context of availability of resources to the state budgets. These include: (a) tax devolution and grants based on finance commission awards, (b) discretionary transfers in terms of grants from the union government and (c) borrowings from the market. . Keeping in view the constitutional and institutional flow of resources to the state budget, a resource gap model has been designed in this paper. This is named as Basic Resource Gap (BRG) with three variants (BRG 1, BRG 2 and BRG 3). Based on the BRG, fiscal dependency ratio (FDR) and fiscal stress ratio (FSR) have been worked out in this paper. The empirical findings broadly suggest that in respect of the consolidated position (all states together) nearly 50% of the total resource originated from the dependent and stressed sources. A further breakup of this reveals that while resources from dependent sources were 22%, the resources from stressed source were 28% of the total available resources. This analysis is an analytical improvement over the conventional approach of fiscal deficit. BRG model, besides filling the gap in the literature of fiscal federalism, will be operationally helpful to the state governments in terms of a holistic picture of the resource gap incorporating the constitutional and institutional resource flows to the state budgets based on the accounting arrangements in conformity with consolidated fund and public accounts. In essence, BRG along with FSR and FDR will add analytical rigor to the analysis of hard budget constraints in terms of resource availability to the state governments.

Expensive Tastes and Public Funding for the Arts

A challenging question in moral philosophy is how to gauge the achievement of equity between individuals when people differ in their preferences, and in particular where some people might have “expensive tastes”, in that the goods necessary to bring them to a certain level of welfare are much costlier to obtain than the goods that bring others to the same level of welfare. “Opera” is an example often presented in the literature, although we can imagine other aspects of culture that are vitally important to a small minority but very costly to provide, and whose benefits are not most often enjoyed by the well-off; the preservation of an aboriginal language, or the specific cultural practices of an immigrant minority, for example. A distinction might also arise if equity involves consideration of whether the “expensive tastes” were deliberately cultivated by the people who hold them. This paper situates the “expensive tastes” debate in the real world of arts funding bodies that value equity in funding, and are challenged with making allocation decisions under hard budget constraints. Should “expensive tastes” matter at all in choices regarding funding, and, if so, how?

The Role of State Owned Enterprises in the Economic Liberalization of Liberia

Over the last three decades, the performance of state-owned-enterprises (SOEs) has been disappointing while the liberalization and privatization of SOEs has been treated with doubts. Policy makers around the world were left with few SOE policy options at a time when their performance caused not only administrative headaches but also political nightmare. The situation in Liberia is similar where a sizeable SOE sector has underperformed and the government has been hard pressed to find solutions to enhance their performances prior to the liberalization program. In this thesis, we examined whether the government imposition of hard budget constraint on SOEs has affected the operations of SOEs. We made a performance comparison of 20 Liberian SOEs between periods when they were under the Liberalization and privatization pressure during 2000-2017 and a period under which they were subject to little liberalization pressure. After conducting time-series and cross-sectional (TSCS) regression analysis with a dataset from 20 Liberian SOEs, we found there existed a statistically significant positive relationship between the Liberalization pressure and the operating efficiency of SOEs. This implies that while finding ways to Liberalize and or privatize SOEs, policymakers need to continually apply liberalization pressures on SOE managers in order to impose hard budget constraints on SOEs. Keywords: Liberalization pressure, liberalization policy, soft budget constraint, operating performance, state-owned enterprise DOI : 10.7176/JESD/10-16-08 Publication date : August 31 st 2019