The Soft Budget Constraint at 40: Alternative Perspectives on Its Origins

The soft budget constraint (SBC) is over 40 years old and may seem too well known by now to need elucidation. In this paper, I discuss its origin and its causes. The concept of thesoft budget constraintwas coined by Janos Kornai, but the origin of the phenomenon that the term captures deserves discussion. Here, I ask why the SBC phenomenon came into being. Kornai considers it a manifestation of paternalism toward SOEs by superior bodies that refuse to let them go under due to symbiotic solidarity with their subordinates. I contend that there are stronger reasons, reasons that inhere in the very core of the bureaucratic allocation system-the method of material balances-that cannot allow enterprises to die just because they generate losses.