Which enterprises (believe they) have soft budgets? Evidence on the effects of ownership and decentralization in Mongolia

To ascertain the prevalence of soft budgets and to find causes of softness, we surveyed Mongolian enterprises, asking whether state aid was expected w hen financial difficulties arose. One-quarter of the enterprises expected s oft budgets, a large proportion of which have central government ownership. We examine causes of soft budgets in addition to state ownership, but the central government variable dominates. These results are confirmed using in strumental variables or bivariate probit to unmask unmeasured selection eff ects. Local government ownership has a much weaker effect than does central ownership, suggesting a crucial role for decentralization. University of M aryland, College Park, Maryland 20742. (C) 2000 Academic Press.