The credible-commitment problem in the center-enterprise relationship

The paper presents a simple game-theoretic model of what happens if the center is unable to make credible commitments about its future behavior toward an enterprise. Under perfect information the center cannot prevent itself from rescuing the enterprise with additional resources or a lower output target. Under imperfect information by acquiring a reputation for toughness the center can credibly threaten not to bail out the enterprise. The model also illustrates storming, plan tautness, plan discipline, the role of the planning horizon, Kornai's soft budget constraint and paternalism, and Gomulka's budget flexibility.