BUREAUCRATIC CONTROL AND THE SOFT BUDGET CONSTRAINT

In the hierarchy of China's state sector, both before and during the c urrent reform period, government bureaucrats select and supervise stat e-owned enterprise (SOE) managers. The incentive problem of SOE manage rs has been studied carefully, but that of the bureaucrats has not. Th is paper uses a model to show that the agency problem of the bureaucra t leads to the persistence of the soft-budget constraint (SBC) in the state sector. This suggests that the problem of SEC is unlikely to go away even when other familiar reasons contributing to the SEC disappea r, e.g., concern about employment. (C) 1998 Academic Press.