TY  - JOUR
AU  - Robinson,James A.
AU  - Torvik,Ragnar
TI  - A Political Economy Theory of the Soft Budget Constraint
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12133
PY  - 2006
Y2  - April 2006
UR  - http://www.nber.org/papers/w12133
L1  - http://www.nber.org/papers/w12133.pdf
N1  - Author contact info:
James A. Robinson
Harvard University
Department of Government
N309, 1737 Cambridge Street
Cambridge, MA  02138
Tel: 617/496-2839
Fax: 617/495-0438
E-Mail: jrobinson@gov.harvard.edu

Ragnar Torvik
Norwegian University of Science and Technology
Department of Economics
N-7491 Trondheim
Norway
E-Mail: ragnar.torvik@svt.ntnu.no
AB  - 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 can in 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.
ER  -