The soft budget constraint and economic theory

The budget constraint as a bookkeeping identity is a fundamental concept for standard microeconomics. Clower reinterpreted it as a rational planning postulate. Formulated for the first time by Janos Kornai (1979) in the context of a Communist economy, the soft budget constraint (SBC) is a heresy for standard microeconomics and for Clower, since a budget constraint is hard by definition. However this concept is now being used to analyze post-Communist, emerging, developing and even advanced capitalistic economies. Over the past fifteen years, the SBC, owing to its generality, has motivated attempt to formalize it as a problem of asymmetry in information. This has reduced the SBC to a problem of time inconsistency, i.e. the lack of credible commitment by the Principal. Thus incorporated in the new microeconomics, the SBC has lost its institutional specificity, this loss impoverishing the concept on a theoretical level. We are thus led to reconsider the premises underlying the original concept and to inquire into the theoretical contradictions and tensions that, ever since Kornai's initial formulation, have been running through his works and impeding the emergence of a more coherent institutional theory of the SBC.