This paper surveys the theoretical literature on the effect of soft budget
constraints on economies in transition from centralization to capitalism; i
t also reviews our understanding of soft budget constraints in general. It
focuses on the conception of the soft budget constraint syndrome as a commi
tment problem. We show that the two features of soft budget constraints in
centralized economies - ex post renegotiation of firms' financial plans and
a close administrative relationship between firms and the centre - are int
rinsically related. We examine a series of theories (based on the commitmen
t-problem approach) that explain shortage, lack of innovation in centralize
d economies, devolution, and banking reform in transition economies. Moreov
er, we argue that soft budget constraints also have an influence on major i
ssues in economics, such as the determination of the boundaries and capital
structure of a firm. Finally, we show that soft budget constraints theory
sheds light on financial crises and economic growth.