THE 2 KORNAI EFFECTS

Kornai's theories of a ''soft budget constraint'' study a firm that re ceives state assistance when expenses exceed revenues. Such assistance is characteristic of classical socialism. It is well known that Korna i contended that a soft budget constraint increases input demands. He also predicted a second effect that has received less attention: input demands exhibit lower price responsiveness. The Second Kornai Effect may be defined in terms of slopes of input demands as Kornai did, or i n terms of elasticities. A simple soft budget constraint model is used to review the First Kornai Effect and to examine the two versions of the Second Komai Effect. (C) 1996 Academic Press, Inc.