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Soft Budget Constraint

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PPGPortal > Home > Concept Dictionary > S > Soft Budget Constraint
 
Soft Budget Constraint

A soft budget constraint is apparent when the strict relationship between revenues and expenditures has been relaxed.

(Janos Kornai (March 1998). “The Concept of the Soft Budget Constraint Syndrome in Economic Theory.” Journal of Comparative Economics, 26 (1), pp. 11-17.)

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Whereas a hard budget constraint implies that expenditures cannot surpass revenues, a soft budget constraint suggests that decision makers understand that there is flexibility in allowing expenditures to surpass revenues. Moreover, a second condition is that the decision maker expects such financial flexibility with high probability, or in fact builds this probability into their planning. The public sector is most frequently accused of adopting a soft budget constraint mentality by taking the rational decision of allowing finances to run into deficit. Soft budgeting takes a number of forms: soft subsidies, which are negotiable and adjusted to cost overruns; soft taxation implies rates tailored to the financial situation of ratepayers, or lax enforcement; soft credit can be used to assist firms in chronic trouble by allowing for unreliable debt servicing, of failing to enforce contracts; and, soft administrative prices allows for prices to be adjusted to reflect costs.
     
Soft Budget Constraint

A soft budget constraint is apparent when the strict relationship between revenues and expenditures has been relaxed.

(Janos Kornai (March 1998). “The Concept of the Soft Budget Constraint Syndrome in Economic Theory.” Journal of Comparative Economics, 26 (1), pp. 11-17.)

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Whereas a hard budget constraint implies that expenditures cannot surpass revenues, a soft budget constraint suggests that decision makers understand that there is flexibility in allowing expenditures to surpass revenues. Moreover, a second condition is that the decision maker expects such financial flexibility with high probability, or in fact builds this probability into their planning. The public sector is most frequently accused of adopting a soft budget constraint mentality by taking the rational decision of allowing finances to run into deficit. Soft budgeting takes a number of forms: soft subsidies, which are negotiable and adjusted to cost overruns; soft taxation implies rates tailored to the financial situation of ratepayers, or lax enforcement; soft credit can be used to assist firms in chronic trouble by allowing for unreliable debt servicing, of failing to enforce contracts; and, soft administrative prices allows for prices to be adjusted to reflect costs.

Approved for glossaryposting by Ben Eisen on January 8, 2011


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