THE PLACE OF THE SOFT BUDGET CONSTRAINT SYNDROME IN ECONOMIC-THEORY

The concept of the budget constraint, previously applied mainly to hou sehold decisions, was extended to enterprises and other organizations initially by Kornai for socialist economies. The more general phenomen on usually includes rent seeking, although not all rent-seeking behavi or is associated with a soft budget constraint (SBC). Rather, SEC anal ysis is a theory of exit, or more precisely, of the demise of organiza tions. Moreover, the syndrome cannot be treated as a special case of t he theory of regulation because not all price regulation softens the b udget constraint. The SEC can emerge in nonregulated spheres, especial ly when financial interactions take place in vertical relationships be tween superiors and subordinates rather than in horizontal market cond itions. (C) 1998 Academic Press.