Soft Budget Constraints, Firm Commitments and the Social Safety Net

Publication Date:

October 1, 1991

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

It is shown that the inefficiencies created by the “soft” budget constraint, enjoyed by enterprises in Eastern Europe and elsewhere, will continue so long as governments are unable credibly to threaten not to bail out loss-makers. Commitment to a “hard” budget constraint can best be achieved by the institution of a suitable social safety net. The burden on the social safety net can be reduced by the (endogenous) development of financial markets.

Series:

Working Paper No. 1991/098

Subject:

Budget planning and preparation Employment Moral hazard Social assistance spending Unemployment

Notes:

Also published in Staff Papers, Vol. 39, No. 2, June 1992.

English

Publication Date:

October 1, 1991

ISBN/ISSN:

9781451949094/1018-5941

Stock No:

WPIEA0981991

Pages:

26

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