This is a story of the soft budget constraint. It seeks an answer to a paradox: the prevalence of the soft budget constraint in spite of the tremendous inefficiencies that it gives rise to, and its persistence in spite of reform of the system of which it is an integral part. The story aims at increasing our understanding of why the phenomenon exists. By studying the case of state-owned enterprises in Tanzania before, during and after socialism, an explanation of the emergence, persistence and logic of the soft budget constraint is suggested. This introductory chapter presents an argument showing why this story is worth telling. It discusses the research topic and how the problem it presents is attacked.


Gross Domestic Product Socialist Economy Empirical Examination Informal Institution Public Enterprise 
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  1. 1.
    See Kornai (1979), (1980) and (1986c), whose idea of various aspects of the concept is discussed in more detail in Chapter II.Google Scholar
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    Many of what are referred to as objectives of the state, suggested as explanations for the soft budget constraint in the literature, to a large extent reflect the institutional structure and the incentives it creates. The wish of the state to maintain the level of public enterprise employment, for instance, can be seen as the expression that its more general taste for power takes under certain institutional conditions: monopoly granted to state enterprises created by trade regulation.Google Scholar
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    The works of Fukuyama (1995) and Putnam (1993) represent the increased recognition of the role of culture for economic performance and the functioning of formal rules.Google Scholar

Copyright information

© Springer Science+Business Media New York 2000

Authors and Affiliations

  • Gun Eriksson Skoog
    • 1
  1. 1.Stockholm School of Economics — EFI The Economic Research InstituteSweden

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