The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Soft Budget Constraint

  • Gérard Roland
Reference work entry


The concept of ‘soft budget constraint’ was first proposed by Janos Kornai to explain the pervasiveness of shortages under socialism. It has subsequently been understood mostly as a dynamic incentive problem whereby an investor would like to commit not to bail out an agent but ends up deciding on a bailout ex post. The concept has had a large number of applications in the transition literature but more broadly in economics as it can shed light on important episodes of bailouts.


Adverse selection Asymmetric information Bail-outs Business networks Capitalism Central planning Centralized and decentralized banking Chinese economic reforms Commitment Contract theory Fiscal competition Hard budget constraint Hoarding Incentive Innovation Kornai, J. Local government Monitoring Paternalism Price Liberalization Privatization Ratchet effect Shortage Socialism Soft budget constraint Sunk costs 

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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Gérard Roland
    • 1
  1. 1.