Soft budget constraints and banking in transition economies

In this paper, we focus on soft budget constraints for enterprises that are financed by banks in transition economies and analyze several theoretical models as variants of a basic sequential model. Despite various transmission channels for soft budget constraints, all models share the same sequential structure in which soft budget constraints arise due to the endogenous lack of credibility for liquidating a project instead of refinancing it. All also have the same property that refinancing is optimal ex post for the decision maker. Hence, mechanisms for hardening the budget constraint require endogenously restoring the credibility of liquidation. (C) 1998 Academic Press.