Soft Budget Constraints Research Articles

Are Fiscal Transfers and Bail-Outs the Perpetrators? A Study on Moral Hazard Problem in Indian Federal Finance

The informational advantage of the sub-national governments in conjunction with central government’s involvement in bail-outs and financial assistance sometimes leads to negative incentives by relaxing the budget constraint. This produces moral hazard in terms of compromised fiscal behaviour; lower revenue effort, extravagance in expenditure, higher deficits and increased borrowings. At the same time, central assistance to low-performing states demotivates fiscally efficient states. The Indian fiscal federal structure and the fiscal transfer system are often criticized for prompting inefficiency and moral hazard in sub-national fiscal performance. Considering the issue of fiscal inefficiency in the Indian states, this study seeks to explore the fiscal mechanism of revenue effort, deficit, borrowing, capital outlay and revenue expenditure using a panel dataset of 28 states for the period 2000–2019. Accounting for the geographical and other disadvantages of the states, the findings of the panel-regression analysis confirm fiscal distress and the existence of soft-budget constraint and moral hazard in the Indian states. JEL Classification: H, H2, H21, H3, H7

Efficiency of Professional Polish Volleyball Clubs PlusLiga, Poland: Data Envelopment Analysis Approach

The aim of the article is to assess the degree of variation in the efficiency of professional men’s volleyball clubs playing matches at the highest level of competition in Poland PlusLiga in the 2020/2021 season. The non-parametric Data Envelopment Analysis (DEA) method was used to measure efficiency. The research is supported by the fact that the literature evaluates the efficiency of mainly football clubs. Therefor, the research extends the efficiency analysis to include volleyball clubs on the example of Poland, where in recent times both clubs and the national team have been highly successful on the world stage. The results of the research indicate that the efficiency of PlusLiga clubs varies. More than half of the (inefficient) clubs have too high expenses (operating costs) in relation to the actual financial and sporting results. The study shows that the technology of efficient clubs is mainly based on generating significantly higher revenues than operating costs. This allows efficient clubs to convert expenses into results more efficiently than inefficient clubs. Inefficiencies have been observed mainly in clubs where local governments are the majority shareholder. They generate negative financial results and use budget funds from their owners to cover losses and maintain economic stability. They operate under soft budget constraints and are favoured by local governments to prevent their bankruptcy. By identifying differences in efficiency using established benchmarking coefficients, the optimal amount of expenditure for inefficient clubs was determined and what measures should be taken to improve their efficiency.

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.

Soft budget constraints and technological innovations: evidence from China

Soft budget constraints and technological innovations: evidence from China

Regulating local government debt in China: Intended and unintended consequences

This study integrates institutional and empirical analyses to investigate the intricate policies that regulate local government debt in China. It finds that, within a remarkably short period, China has skilfully incorporated local government debt into the local budget management system, thereby transforming it from a mere transaction between local governments and credit agencies to an intergovernmental fiscal relations framework. The study also establishes that the pivotal debt-regulating policies are more geared towards prioritizing the cost of debt over its scale. Official documents, statistical data, and in-depth interviews provide evidence to support these findings. Drawing on an analysis of county-level panel data in Sichuan Province, this study identifies two main effects of these policies. Primarily, the cost of local general debt may trigger the notorious soft budget constraint, thereby incentivizing county-level governments to depend more heavily on superior transfer payments. Additionally, the fiscal consolidation policy, which focuses on the cost of local special debt, may lower the debt ratio. However, it also has the unintended consequence of bolstering the local government’s reliance on land finance.

The Impact of Financing Constraints on the Efficiency of Investment and Construction: Evidence from Municipal Infrastructure in China

Imperfect external capital market and internal soft budget constraints are important reasons for the issue of enterprise financing constraints. This paper studies the impact of financing constraints and influencing factors of financing constraints in municipal infrastructure investment and construction for local governments by using the panel data from 2003 to 2018 in China. The results show that, first, there are great financing constraints in municipal infrastructure investment and construction for local government in China. Second, the increase of self-financing capacity and external financing capacity can reduce the level and uncertainty of financing constraints, thus improving the efficiency of municipal infrastructure investment and construction. Third, the expansion of the city scale may reduce the uncertainty of financing constraints, but improve the level of financing constraints thus reducing the efficiency of municipal infrastructure investment and construction.

Do conformity and bailouts affect misreporting? The case of public health-care organisations

Most literature on the antecedents of misreporting in the public sector focuses on the propensity to report financial breakeven, with limited attention to the regulatory and normative incentives that may alter such propensity. This study provides novel explanations for public sector organisations' deviation from breakeven. Its underlying assumption is that misreporting may be shaped by mimetic pressures encouraging conformity as well as regulatory pressures conveyed through soft budget constraints. The empirical analysis includes all Italian public healthcare organisations over 17 years. The findings suggest that public healthcare organisations may manipulate accruals not only to achieve financial breakeven, but also to conform with peers’ financial performance or to worsen reported financial performance in anticipation of a bailout.

Does Systemically Important Bank Status Induce Soft Budget Constraint Syndrome? Evidence From India.

Does Systemically Important Bank Status Induce Soft Budget Constraint Syndrome? Evidence From India.

Has inspection supervision effectively reduced the risk of local government debt? Evidence from China

This paper employs a difference-in-differences (DID) model to analyze data from 289 Chinese prefecture-level cities from 2009 to 2016 and comes to the following conclusion: patrol supervision can reduce the risk of local government debt. After conducting a series of robustness tests, including propensity score matching (PSM) tests, transformation study design, and replacement of explained variables, this conclusion remains robust. Further investigation reveals that the effectiveness of inspection and supervision in reducing local government debt risk is more pronounced in regions with a poorer financial ecological environment and a greater soft budget constraint, indicating a substitute function. By examining the impact of patrol supervision on local government debt risk, this paper provides valuable insights for preventing and resolving major risks and offers up recommendations for future efforts in this domain.

Analysis of the Factors Influencing the Dependence of Local Governments on Land Finance in China

With the increasing debt accumulated by local governments, land finance has become an important issue worth paying attention to in the Chinas economy. Based on the political economy literature, this paper selects general public budget expenditure, regional GDP, per Capita GDP, urbanization rate of permanent people, and the development of the secondary industry as independent variables and the dependence on land finance of the local government as dependent variable. Panel data from 22 provincial local governments is collected for empirical research. The empirical results indicate that accelerating urbanization, general public budget expenditure have led to local governments obtaining extra-budgetary land fiscal revenue. The growth of regional GDP and the expansion of the secondary industry will bring revenue to the region, which will help reduce the dependence of local governments on land finance. The political economics research on land finance helps to understand the economic behavior of local governments in China and also contributes to understanding the issue of soft budget constraint.

Endogenous money, soft budget constraint and the banking regulation

AbstractA key observation of the endogenous money theory is that banks create deposits (money) by lending. This means that banks apparently face soft budget constraint in responding to demand for credit. However, there are several limiting factors, which can make the banks' money creation somewhat constrained, and can thus harden their budget constraint. Such factors include the need to preserve banks' profitability and the bank regulations (the capital and liquidity requirements). Previous literature on soft budget constraint (SBC) in banking mentioned government bailouts, central banks lender-of-last-resort policies, or the poorly informed depositors who over-finance banks, as reasons for the SBC for banks. Taking the endogenous money theory as a starting point, we use a different approach. We analyze whether the tools that aimed to keep the bank's budget constrain hard are appropriate for this purpose. Our analysis, as well as lessons from several recent bank crisis episodes suggest, that under current banking regulation SBC is an inherent feature of banking.

From “actually existing socialism” to actually existing post-socialism: János Kornai and the importance of language reform in political economy

AbstractThis paper discusses the contributions of János Kornai to the “language reform” of socialism and post-socialism, meaning the creation of new conceptual frameworks to replace the mainstream interpretation of the system with a more realistic, critical description. We show that, in the three waves of language reform under the Kádár regime – economics, sociology, and law – Kornai was a trailblazer by introducing concepts like “soft budget constraint,” “plan bargaining,” and “shortage,” which became key concepts for reform economists and dissident intellectuals in Eastern Europe. We discuss Kornai's work on post-socialism as well, particularly his paper “The System Paradigm Revisited,” and point out its merits and shortcomings in the description of the regimes of the region. Presenting our offer for a new language reform, based on Kornai, we underline the importance of proper words for understanding “actually existing post-socialism,” and the task of political economists to revise the current mainstream and analyse the phenomena of post-communist “relational economies.”

Modern pillories: Overdue debts of the poor

AbstractWe model the consequences of the soft budget constraint in the context of retail borrowers. While János Kornai formulated the term of “soft budget constraint” mainly for organizations (firms, banks, municipalities, NGOs, etc.), we show that it can be applied to individual borrowers as well. We derive the feasibility conditions for private and public debt relief programs in a utilitarian framework and find that lenders have no interest in offering payment reductions if non-performing borrowers are few, have small debts, and are difficult to reach – precisely the characteristics of the poor. In this situation, poor debtors serve better as deterrents, similarly if we put them into a pillory. We calibrate the model parameters to survey data on poor households struggling with overdue debts in small villages in a disadvantaged rural region in Hungary. We find that in normal economic circumstances, private debt relief programs are not feasible. State intervention can be justified by positive externalities and moral considerations.

János Kornai on planning and disequilibrium: Theoretical dilemmas and solutions

AbstractJános Kornai has achieved a wide-scope multifaceted theoretical analysis moving from Marx to Walras-Lange, then to post-Keynesian disequilibrium economics, and eventually, to Hayek and economic institutionalism. Such a travel is not without meeting dilemmas that Kornai has had to struggle with and opt to resolve them in some way. Such process is illustrated first with a planner's dilemma. On the one hand, Kornai has elaborated on – together with Tamás Lipták – a mathematically ‘super’ solution to finding the optimal plan through a two-level planning procedure. But once implemented the latter has appeared to be too slow, and Kornai has rejected Lange's ideas for Hayek's criticism against central planning. A second dilemma is about how to analyse a centrally-planned shortage (excess demand) economy in which those industries privileged in the planners' pecking order priorities were producing an excess supply of (useless) goods. Kornai did not find a solution in the current disequilibrium economics but, instead, in a ‘lax’ communist bureaucracy generating a soft budget constraint. The third dilemma is that Kornai's views about disequilibria have not converged with the Post-Keynesian disequilibrium models. The latter were unable to conceive a simultaneous excess demand and excess supply in a same market, due to their so-called shorter-side rule. Instead, Kornai has found a solution that fits with theorising the observed micro (or even infra-micro) disequilibria in a Debreu's book, some years after having published a hard criticism of neo-classical microeconomics. A final question is raised: is Kornai's theory a decisive contribution to the analysis of comparative economic systems – that no one denies – or has he added some value to a more general theory of economic disequilibrium?

Professional Team Sports and the Soft Budget Constraint

Professional Team Sports and the Soft Budget Constraint

State-market dynamics of central business district (CBD) development in Chinese cities – An anchor-firm perspective

Unlike their Western counterparts, central business districts (CBDs) built in post-reformed China are often situated in remote locations without pre-existing advantages. Neither market-centered nor state-centered mechanisms can sufficiently explain their emergence and growth. Using the lens of state–market dynamics and perspective of anchor firm, this study examines the spatiality and growth of two recently established CBDs in Guangzhou. Important processes are captured. (1) Empowered by soft-budget constraints, the local government can launch ambitious CBD projects in peripheral locations. (2) Owing to its relationship with state-owned enterprises and its capability in manipulating the land market, the local government has adopted an anchor-firm strategy to engender positive externalities that attract additional investments and industries. This strategy has played a crucial role in expediting the launch of a new CBD. (3) Although state initiatives are pivotal in initiating the growth of Chinese CBDs, their effectiveness is subject to the locational attributes of producer services, the central CBD activities. The findings highlight the intrinsic relationship between the state and the market, which is fundamental in theorizing the nature and dynamics of new urban space production in China.

The Problem of Soft Budget Constraint: The Example of Local Governments in Türkiye

Esnek bütçe kısıtı olduğu durumda devletin destek verdiği kurum ve kuruluşlar harcamalarını artırma eğiliminde olabilirler. Merkezi yönetim, yerel yönetimlerdeki açığın tamamını veya bir kısmını karşılamaya hazır olduğunda, esnek bütçe kısıtlaması ortaya çıkmaktadır. Yerel yönetimler mali sıkıntılarının giderilmesini fırsat olarak görebilirler. Mali kurtarma beklentisi davranışı süreklilik kazanabilir. Bu beklenti onların karşılayabileceğinden daha fazlasını harcamalarına neden olur. Yapılması gereken yerel yönetimlerin öz gelir elde etme çabalarının artmasını sağlama yolunda adımlar atılmasını sağlamaktır. Merkezi yönetim, herhangi bir olumsuz mali durum yaşanması halinde yardım etmeyeceğini belirtmesi gerekir. Böylece yerel yönetimler kazanç elde etme yollarına yöneleceklerdir. Bu nedenle bütçe kısıtını esneten değil, bütçe kısıtını katılaştıran uygulamalar harcama yapmalarının önüne geçebilir. Türkiye'deki çalışmaların yerel yönetimleri daha çok mali özerklileri açısından değerlendirdikleri görülmüştür. Bu çalışmada bütçe kısıtlamasını esneten ve yerel yönetimlerin beklenti ve davranışlarına yön veren faktörler ve araçlar bağlamında yerel yönetimler değerlendirilmiştir. Bu anlamda akademik literatüre katkı sağlayacağı düşünülmektedir. Bu çalışmanın amacı merkezi yönetimin hangi durumlarda yerel yönetimlerin yükümlülüklerine kefil olacağını, yerel yönetimlerin niçin öz gelir yaratma konusunda isteksiz olduklarını ve mali ve siyasi kurtarma beklentisi içine girdikleri durumları tespit etmektir. Yöntem olarak yabancı ve yerli literatür araştırılmıştır. Çalışmanın bulgularına göre Türkiye’de merkezi yönetimin yerel yönetimlere yapılan transferleri kısabilmesi için yasal bir değişiklik yapılması gerekir. Yerel yönetimlerin vergi, resim, harç ve benzeri zora dayanan yerel gelir kalemleri üzerinde tasarruf yetkileri sınırlı olduğu için bu kaynaklardan etkin bir şekilde yararlanamamaktadırlar.

Health Expenditure Decentralization and Health Outcomes: The Importance of Governance

Abstract Does health expenditure decentralization improve a nation’s health? Should countries care about governance quality when they decentralize healthcare spending to local governments? We answer these questions using cross-country data comprising fifty countries from 1996 to 2018. We find that health spending decentralization worsens health outcomes, which are offset by better governance of government. We calibrate the maximum feasible degree of health expenditure decentralization to have positive effects on health outcomes for a given percentile distribution of governance quality. Countries should be mindful of this negative consequence of health spending decentralization and should ensure that the quality of their governance exceeds a certain threshold to offset this negative externality. We also find that vertical fiscal imbalance is negatively associated with health outcomes, underscoring the role of revenue decentralization in improving the fiscal discipline of local governments by avoiding moral hazard caused by soft budget constraints and the common pool problem.

Soft budget constraints in Polish public healthcare entities

Although the theory of soft budget constraints is widely presented in the literature, little is known about the factors of soft budget constraints in public hospitals in Poland. This study is relevant because many Polish hospitals struggle with serious debt problems. The study aims to systematise the regulatory and legal provision of soft budget restrictions in the activities of healthcare institutions, particularly public hospitals in Poland, and to assess the impact of these restrictions on their further functioning. An analysis of hospitals’ regulatory and legal activities shows the implementation of various soft budget restrictions. On November 20, 2019, Poland returned to the soft budget constraints, which functioned immediately after the introduction of reforms in the late 90s of the last century. As of 2021, out-of-pocket costs for treatment have decreased to 19.56%, but costs are gradually increasing and in 2020, according to the World Bank, they amounted to 71.89%. The provision of medical services mainly by public hospitals owned by local governments and scattered healthcare debt make it difficult to liquidate an inefficient public hospital in the event of its default. The study proves that the main reason for not eliminating the soft budgetary constraints of hospitals through their commercialization was the inconsistency of the carried out reform of commercialization of hospitals with the financial condition of local authorities. AcknowledgmentThe authors thank the Institute of Economic and Financial Expertise in Łódź for financial support in publishing this paper.

Impact of Policy Signals on Business Performance: An Empirical Analysis of Financial Subsidy Effects on High-tech Enterprises Using Panel Data from 2095 Listed Companies

Based on the samples of A-share listed companies with high-tech certification from 2017 to 2021, this study empirically analyzes the influence of financial subsidy as a "policy signal" on the business performance of high-tech enterprises by analogy with Shannon-Weaver communication model. Using the regulatory effect model and intermediary effect model, and with the help of soft budget constraint and diminishing marginal revenue theory, this study analyzes the reasons why financial subsidy affects the enterprise business performance differently. This study indicates that financial subsidy, as a kind of policy signal source, is regulated by the nature and scale of enterprises, and ultimately improves the financial performance and innovation performance of enterprises through the intermediary effect of R&D investment intensity and external market valuation.