How firms use workforce size adjustment as a strategic response to external shocks such as exchange-rate fluctuations is an important but not yet fully understood topic. To address the void in the ...literature, we apply the strategy tripod theoretical framework, which sees the external shocks as an industrial impact, the budget constraints as an institutional force, and the firm leverage as an organisational capability to examine the firms’ strategic response in terms of workforce size adjustment in the Chinese economy context. Based on longitudinal data of Chinese manufacturing firms, our analysis finds that facing exchange rate shocks, firms with hard budget constraint are more responsive in adjusting their workforce than firms with soft budget constraint. Furthermore, highly levered firms, with hard budget constraint, will adjust their workforce more aggressively than firms with less debt in their financial structure.
•A dynamic infinite-horizon model of fiscal federation is developed.•Relationships between transfer, debt, and fiscal decentralization are analyzed.•Framework is applied to study decentralization and ...debt in Spain during 1988-2006.
This paper develops a dynamic infinite-horizon model with two layers of governments to study theoretically and quantitatively how fiscal decentralization affects local and central government debt accumulation and spending. In the model, the central government makes transfers to local governments to offset vertical and horizontal fiscal imbalances. But the anticipation of transfers lowers local governments’ expected cost of borrowing and leads to overborrowing ex ante. Absent commitment, the central government over-transfers to reduce local governments’ future need to borrow, and in the equilibrium both local and central debts are inefficiently high. Consistent with empirical evidence, when fiscal decentralization widens vertical fiscal imbalances, local governments become more reliant on transfers, and both local and central debts rise. Applied to Spain, the model explains 39 percent of the rise in total government debt when the vertical fiscal imbalances widened during 1988–1996, and 18 percent of the fall in debt when the imbalances narrowed during 1996–2006.
Soft budget constraint refers to the phenomenon that money losing inefficient projects keep on getting subsidies and operating. It was first phrased and analyzed by the late Hungarian economist Janos ...Kornai when he studied former socialist economies and by now, economists generally have agreed that soft budget constraint also exists extensively in market economies. As an important area of research in government and economics, existing explanations of soft budget have focused on the government's lack of commitment to terminate inefficient investment projects. In this paper, we propose a new theory in which soft budget constraint is an optimal governmental mechanism to induce greater effort in project selection. The idea is that if a manager (banker) selects a bad project, he has to keep on subsidizing it and lose more. Anticipating this, soft budget constraint makes the manager work hard to avoid choosing bad projects. Our theory sheds light on research in government and economics from the perspective of mechanism design.
This study integrates institutional and empirical analyses to investigate the intricate policies that regulate local government debt in China. It finds that, within a remarkably short period, China ...has skilfully incorporated local government debt into the local budget management system, thereby transforming it from a mere transaction between local governments and credit agencies to an intergovernmental fiscal relations framework. The study also establishes that the pivotal debt-regulating policies are more geared towards prioritizing the cost of debt over its scale. Official documents, statistical data, and in-depth interviews provide evidence to support these findings. Drawing on an analysis of county-level panel data in Sichuan Province, this study identifies two main effects of these policies. Primarily, the cost of local general debt may trigger the notorious soft budget constraint, thereby incentivizing county-level governments to depend more heavily on superior transfer payments. Additionally, the fiscal consolidation policy, which focuses on the cost of local special debt, may lower the debt ratio. However, it also has the unintended consequence of bolstering the local government’s reliance on land finance.
From the fourth quarter of 2007 to the second quarter of 2020, the monetary base in the euro area grew by 330%, the money supply by 61% and inflation measured by the consumer price index - only 17%. ...Interest rates are around zero and negative, inflation is low, and we often register deflation. This discrepancy between the growth of money and prices has not only practical dimensions for the ECB and FED monetary policy, but also a theoretical significance. In this contribution, we propose an interpretation of these trends on the basis of concepts developed by J. Kornai in his
Economics of Shortage
analysis, from which we derive our insights on the sovereign debt market situation in European countries. J. Kornai was an unclassifiable economist whose work reflected to some extent the influence of the Austrian School of economics. The point here is not to transpose Kornai’s shortage economy analysis to European capitalist economies, but to show that similar phenomena are appearing today in a different institutional context.
The paper examines whether the concept of the soft budget constraint (SBC) helps understanding how lower tier football coped with the revenue drop during the COVID19.
A qualitative research design ...relying on expert interviews and document analyses was employed. A sample of five clubs was examined using process-tracing methods.
Overspending and debt-making are persistent features of German lower tier football. Before the pandemic, clubs benefitted from distinct bail-outs. The revenue drop during the pandemic was primarily compensated by public subsidies; clubs also got money injections from fans, sponsors and investors. Yet, shareholder structure matters for the likelihood that clubs faced hard budget constraints.
The system of promotion and relegation facilitates overspending and debt-making. The specific corporate of German football clubs encourages moral hazard and creates hold-up risks. The public seems to have become more hesitant to grant bail-outs.
The concept of the soft budget constraint is instructive for understanding the specific economics of European football but its limits have to clearer specified.
This study attempts to measure the inefficiency associated with aggregate investment in a transitional economy. The inefficiency is decomposed into allocative and technical inefficiency based on ...standard production theory. Allocative inefficiency is measured by the deviation of actual investment from the theoretically desired investment demand. Institutional factors are then identified as part of the driving force of the deviation. The resulting model is applied to Chinese provincial panel data. The main findings are: Chinese investment demand is strongly receptive to expansionary fiscal policies and inter-provincial network effects; the tendency of over-investment remains, even with signs of increasing allocative efficiency and improving technical efficiency.
We use a “natural experiment”, the fiscal adjustment of Italy in the 1990s to meet the Maastricht criteria, to test a simple model of soft budget constraint that closely resembles the ...intergovernmental relationships in the Italian public health care sector. We show that the link between the ex-ante financing by the Central government and the health expenditure by regions was stronger when regional expectations of future bailing outs were presumably lower. Confirming previous research, we also prove that more fiscally autonomous regions were more financially responsible and that a political “alignment” effect was present, with “friendly” regional governments controlling more expenditure than unfriendly ones. Our results suggest that, at least in Italy, bailing out expectations by regions may be the missing variable emphasised by Culyer A.J., 1988. Health care expenditures in Canada: Myth and reality. Canadian Tax Papers, 82 for empirical models explaining health expenditure. Our results also raise some worries about the outcome of the current decentralization process in Europe.
China's growth rate has been declining every year since 2010, from 10.6% to 6.7% in 2016, and the IMF expects it to drop further, to 5.8% in 2021. Expert opinion on what to do has ranged widely. The ...optimists view cyclical factors to be the cause of the downturn, and suggest macro-stimulus as the cure. The pessimists identify supply-side distortions to be the cause, and recommends comprehensive structural reform. We argue that the existence of the soft-budget constraint guarantees the creation of excess capacity and zombie firms, and that the correct demand-side supplement to supply-side structural reform should be the termination of the soft-budget constraint and not the implementation of macro-stimulus. Correction of the distortion in the composition and size of investment will render the composition of output to match the composition of consumer demand, and put the economy on a sustainable growth path that is more consumption-oriented.
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