Editing Budget constraint (section)

== Soft budget constraint ==
The concept of '''soft budget constraint''' is commonly applied to centrally planned economies, later [[Economy|economies]] in transition. This theory was originally proposed by [[János Kornai]] in 1979. It was used to explain the "economic behavior in socialist economies marked by shortage”.<ref>{{cite journal |last1=Kornai |first1=János |last2=Maskin |first2=Eric |last3=Roland |first3=Gérard |title=Understanding the Soft Budget Constraint |journal=Journal of Economic Literature |date=2003 |volume=41 |issue=4 |pages=1095–1136 |doi=10.1257/jel.41.4.1095 |jstor=3217457 }}</ref> In the socialist transition economy there are soft budget constraint on firms because of [[subsidies]], credit and price support.<ref>{{cite journal |last1=Maskin |first1=Eric |last2=Xu |first2=Chenggang |title=Soft budget constraint theories: From centralization to the market |journal=The Economics of Transition |date=March 2001 |volume=9 |issue=1 |pages=1–27 |doi=10.1111/1468-0351.00065 |s2cid=154707861 |hdl=10722/138701 |hdl-access=free }}</ref> This theory implies that the survival of a firm depends on financial assistance, especially in a socialist country. The soft budget constraint [[syndrome]] usually occurs in the [[paternalistic]] role of the State in economic organizations, such as public and private companies and non-profit organizations. [[János Kornai]] also highlighted that there are five dimensions to evaluate the post-socialist transition, including fiscal [[subsidy]], soft [[tax]]ation, soft [[Credit|bank credit]] (non-performing loans), soft [[trade credit]] (the accumulate rears between firms) and [[Arrears|wage arrears.]]<ref>{{cite journal |last1=Vahabi |first1=Mehrdad |author-link=Mehrdad Vahabi |date=2001 |title=The Soft Budget Constraint : A Theoretical Clarification |url=https://hal.archives-ouvertes.fr/hal-00629160/file/SBC-REL.pdf |journal=Recherches Économiques de Louvain / Louvain Economic Review |volume=67 |issue=2 |pages=157–195 |doi=10.1017/S0770451800055883 |jstor=40724317 |s2cid=152556966}}</ref>

According to the point of view by Cllower [1965],<ref>{{cite journal |last1=Kornai |first1=János |title=The Soft Budget Constraint |journal=Kyklos |date=February 1986 |volume=39 |issue=1 |pages=3–30 |doi=10.1111/j.1467-6435.1986.tb01252.x }}</ref> budget constraints are a rational planning assumption with two main attributes. The first is that budget constraints refer to the decision makers' behavioural characteristics --- selling output or acquiring asset income to compensate for spending. This means that adjustment limitation on financial resources are obvious. The second is to impose constraints on prior variables, such as constraints on current actual demand based on expectations of future financial conditions.

The reason for the soft budget constraints is that the excess of [[expenditure]] over income will be paid by additional organizations (the State). In addition, the decision maker expects such external financial assistance to be highly probable based on his actions. The further explanation is the more excess spending is covered by external aid, the budget constraints will be more softer.

=== Bank ===
Bank [[supervision]] refers to the supervision on the [[capital adequacy ratio]] of banks. When the bank's capital is difficult to finance due to the default of a large number of loans, it can prevent the bank from going bankrupt with the aid of the government, then it will occurs the soft budget constraint of the bank.<ref>{{cite journal |last1=Du |first1=Julan |last2=Li |first2=David D. |title=The soft budget constraint of banks |journal=Journal of Comparative Economics |date=March 2007 |volume=35 |issue=1 |pages=108–135 |doi=10.1016/j.jce.2006.11.001 }}</ref>

Dewatripont and Maskin(1995) point out the presence of [[sunk costs]] in existing loans may lead to soft budget constraints when banks need additional financial assistance. The [[Internalization (sociology)|internalization]] of external options can expand the model by allowing banks to allocate funds between new loans and refinancing old loans. Through investment screening and monitoring technology, banks can improve the relative profitability of new loans, thus breaking the equilibrium of soft budget constraints.<ref>{{cite journal |last1=Berglöf |first1=Erik |last2=Roland |first2=Gérard |title=Soft budget constraints and credit crunches in financial transition |journal=European Economic Review |date=April 1997 |volume=41 |issue=3–5 |pages=807–817 |doi=10.1016/S0014-2921(97)00055-X }}</ref>