Soft Budget Constraints Macroeconomic Analysis icon

Soft Budget Constraints Macroeconomic Analysis




НазваSoft Budget Constraints Macroeconomic Analysis
Дата29.06.2013
Розмір445 b.
ТипДокументи


Soft Budget Constraints

  • Macroeconomic Analysis,

  • Topic 2


Central Idea and Keywords

  • Central Idea:

  • Indirect Government Support: Conventional versus Optimal Strategies

  • Keywords:

  • Soft budget constraints (SBC), hard budget constraints (HBC)

  • Soft subsidies, soft taxes, soft credits, soft prices, trade credit, tax arrears, barter

  • Rent-seeking, bargaining and lobbying



Lecture Plan

  • Definition and Classification of SBC

  • “Classical” and Contemporary Methods of SBC

  • Influence of SBC on Economic Agents

  • Indirect Government Support: Optimal Strategy



Literature:

  • Mandatory:

  • Kornai J. The Soft Budget Constrtaint…

  • Schaffer M. E. Do Firms in Transition Economies Have Soft Budget Constraint?...

  • Легейда Н. Непрямі субсидії в Україні… - стор. 6-27

  • Rodrik D. Industrial Policy for the Twenty-First Century – p. 8-14, 21-25

  • Supplementary:

  • Легейда Н. Непрямі субсидії в Україні…

  • Rodrik D. Industrial Policy for the Twenty-First Century



Lecture Plan

  • Definition and Classification of SBC

  • “Classical” and Contemporary Methods of SBC

  • Influence of SBC on Economic Agents

  • Indirect Government Support: Optimal Strategy



Definition and Classification of SBC

  • SBC:

  • Pecuniary government support

  • Targeting distressed economic agents

  • Aimed their survival

  • Based on paternalistic state preferences

  • Resulted from lobbying of government officials

  • (Kornai, 1986)



Definition and Classification of SBC



Definition and Classification of SBC

  • Higher Probability of Getting Government Aid –

  • Softer Budget Constraints



Definition and Classification of SBC



“Classical” Methods of SBC

  • Soft Subsidies

  • Soft Taxes

  • Some agents do get subsidies or confront lower taxes while other agents of similar region, industry, or ownership do not

  • Soft Credits

  • (even for high interest rates) contract enforcement is inadequate; debt clearing is non-transparent; overdue payments or non-payments of the debt is tolerated

  • Soft Prices

  • administratively determined prices set below market prices



Definition and Classification of SBC: Self-test questions

  • Relationship between SBC and firms’ budget constraints

  • Eligibility criteria of getting government aid: SBC versus HBS

  • Four “classical” (Kornai) methods of SBC



Lecture Plan

  • Definition and Classification of SBC

  • “Classical” and Contemporary Methods of SBC

  • Influence of SBC on Economic Agents

  • Indirect Government Support: Optimal Strategy



Influence of SBC on Economic Agents

  • Rent-seeking:

  • One of the concepts of public choice theories

  • Rent = Supply Price – Cost of Goods

  • alternatively

  • Rent = Monopolistic Profit







Influence of SBC on Economic Agents

  • Monopolists use their bargaining power (monopolistic rent) to lobby

  • Legislative changes

  • New licensing

  • etc.

  • that increase their future profits

  • Monopolists reallocate their efforts from production to lobbying



Influence of Regulatory Policy (public choice approach)

  • Stigler:

  • Expropriates revenues of some economic agents in order to support other agents

  • Creates barriers to entry

  • Via influence on complement or substitute goods, or price regulation

  • Peltzman:

  • Politicians evaluate bargaining power of different agents

  • and support those who increase their probability of being re-elected



Influence of Regulatory Policy (profitable and distressed firms)

  • Economic agents focus on political connections rather than production efficiency

  • Influence on

  • Demand structure

  • Demand elasticity

  • Investment projects

  • External shocks (interest and exchange rates fluctuations; price changes; competitors’ innovations etc)

  • Read Kornai (be ready to discuss)



SBC and Government Credible Commitments

  • It is generally agreed that SBC depresses economic system

  • Thus, contemporary governments declare not to provide SBC

  • Definitions of SBC:



Influence of SBC on Economic Agents: Self-test questions

  • Bargaining power of lobbyists (for the case of constant MC and increasing MC)

  • The essence of regulatory policy (public choice approach)

  • Influence of SBC on firms’

  • Demand structure

  • Demand elasticity

  • Investment projects

  • External shocks



Lecture Plan

  • Definition and Classification of SBC

  • “Classical” and Contemporary Methods of SBC

  • Influence of SBC on Economic Agents

  • Indirect Government Support: Optimal Strategy



Contemporary Methods of SBC

  • Trade Credit

  • Subsidies providing via banks

  • Tax Preferences

  • Barter (read yourself)



Assignment 1: Match a situation with a proper SBC method



Contemporary Methods of SBC: Trade Credit (Interenterprise Arrears)

  • Trade credit is widespread both in developed and transition countries

  • Reasons Behind Trade Credit use:

  • Developed countries:

    • Increase of sales via attracting clients unable to cover the entire cost of a good immediately
    • (the share of overdue payments is infinitely small)


Contemporary Methods of SBC: Trade Credit (Interenterprise Arrears)

  • Reasons Behind Trade Credit use –

  • Transition countries (expansion of the overdue credit):



Contemporary Methods of SBC: Trade Credit (Interenterprise Arrears)

  • Indirect Government Subsidy =

  • = Overdue Credit Indebtedness –

  • - Overdue Debit Indebtedness





Contemporary Methods of SBC: Subsidies Providing via Banks

  • Detecting Bad Bank Credits:



Contemporary Methods of SBC: Tax Preferences

  • Tax Preferences:

  • Lower tax rates

  • Deferred taxation (відстрочення сплати податків)

  • Tax arrears (податкова заборгованість)

    • the most widespread method of tax preferences in transition economies


Contemporary Methods of SBC: Tax Preferences

  • Definitions to Grasp:

  • Tax Arrears versus Tax Evasion

  • Tax Arrears Stock versus Tax Arrears Flow

  • (read Schaffer, Mark; and Легейда Ніна)



Contemporary Methods of SBC: Tax Preferences

  • Recipients of Tax Preferences:



Contemporary Methods of SBC: Tax Preferences

  • Indirect Government Subsidy (S):











Contemporary Methods of SBC: Self-Test Questions

  • The notion of trade credit, tax preferences, subsidies providing via banks, and barter. Reasons behind their expansion.

  • Indirect subsidies for different SBC methods (remember the formulas and understand them!)

  • The major recipients of indirect government aid:

  • Profitable versus distresses firms

  • Peculiarities of slow reforming countries

  • The major recipients of SBC in UA, the most widespread forms of SBC



Lecture Plan

  • Definition and Classification of SBC

  • “Classical” and Contemporary Methods of SBC

  • Influence of SBC on Economic Agents

  • Indirect Government Support: Optimal Strategy



Indirect Government Support: Optimal Strategy

  • Optimal government aid – focused on:

  • Big projects exhibiting

  • Information externalities (high cost of discovery -especially in unstable societies)

  • Economies of scale and Coordination externalities

  • Production of Non-tradable goods and Public goods (e.g. infrastructure)

  • Correction of market failure such as

  • Absence of the full set market institutions

  • High transaction costs

  • Monopolization of markets etc.



Indirect Government Support: Optimal Strategy

  • Ten design principles for optimal

  • government aid

  • (read Rodrik, p.21-25)



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