Soft budget constraints, social burdens, and labor redundancy in China's state industry

The soft budget constraint hypothesis of Kornai (1980) offers an attractive explanation of overmanning in public enterprises. Sometimes overlooked in the literature is the fact that governments, especially in transition economies, often use state-owned enterprises (SOEs) to pursue non-financial objectives and to finance the resulting social burdens with subsidies and policy loans. In studying a panel of about 700 SOEs, we find that hardening budget constraints, without at the same time relieving SOEs from their social burdens, was a major proximate cause of rising redundant labor in the early 1990s in China. (C) 2003 Association for Comparative Economic Studies. Published by Elsevier Science (USA). All rights reserved.