Do Firms in Transition Economies Have Soft Budget Constraints? A Reconsideration of Concepts and Evidence

This paper first examines various definitions of Kornai's soft budget constraint (SBC) and the difficulties involved in interpreting data on losses, subsidies, and financing and then considers selective evidence from transition economies. Stocks of overdue trade credit are no larger than in Western economies and firms in TEs typically impose hard budget constraints on each other. Banks have not been a systematic source of SBCs as often as is sometimes argued on the basis of data on classified loans; in 1992 Hungarian banks were imposing hard budget constraints on firms at the same time that they were classifying large volumes of their loans as bad. Tax arrears have emerged as a major source, and in the rapidly reforming TEs the major source of SBCs.J. Comp. Econom.,March 1998, 26(1), pp. 80-103. Centre for Economic Reform and Transformation, Heriot-Watt University, Edinburgh EH14 4AS, United Kingdom. © 1998 Academic Press.