No. 9/2005
A POLITICAL ECONOMY THEORY OF THE SOFT BUDGET CONSTRAINT
James A. Robinson
Ragnar Torvik
Abstract:
Why do soft budget constraints exist and persist? In this paper we
argue that the prevalence of soft budget constraints can be best explained
by the political desirability of softness. We develop a political economy model
where politicians cannot commit to policies that are
not ex post optimal. We show that because of the dynamic commitment problem
inherent in the soft budget constraint, politicians canin essence commit to make
transfers to entrepreneurs which otherwise they would not be able to do. This
encourages such entrepreneurs to vote for them. Though the soft budget constraint
may induce economic inefficiency,
it may be politically rational because it influences the outcomes of elections.
In consequence, even when information is complete, politicians may fund bad projects
which they anticipate they will have to bail out in the future.
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