The limits of discipline: Ownership and hard budget constraints in the transition economies

Roman Frydman, Cheryl Gray, Marek Hessel, Andrzej Rapaczynski

    Research output: Contribution to journalArticle

    Abstract

    The existing literature on soft budget constraints suggests that firms may be subsidized for political reasons or because of the creditors desire to recover a part of the sunk cost invested in an earlier period. In all these models hard budget constraints are viewed as being, in principle, capable of inducing the necessary restructuring behaviour on the level of the firm. This paper argues that the imposition of financial discipline is not sufficient to remedy ownership and governance-related deficiencies of corporate performance. Using evidence from the post-communist transition economies, the paper shows that a policy of hard budget constraints cannot induce successful revenue restructuring, which requires entrepreneurial incentives inherent in certain ownership types (most notably, outside investors). The paper also shows that the policy of hard budget constraints falters when state firms, because of inferior revenue performance and less willingness to meet payment obligations, continue to pose a higher credit risk than privatized firms. The brunt of state firms lower creditworthiness falls on state creditors. But the softness of these creditors, while harmful in many ways, is not necessarily irrational, if it prevents the demise of firms that are in principle capable of successful restructuring through ownership changes.

    Original languageEnglish (US)
    Pages (from-to)577-601
    Number of pages25
    JournalEconomics of Transition
    Volume8
    Issue number3
    StatePublished - 2000

    Fingerprint

    Transition economies
    Ownership
    Budget constraint
    Revenue
    Remedies
    Payment
    Creditworthiness
    Ownership change
    Soft budget constraint
    Willingness
    Governance
    Corporate performance
    Incentives
    Obligation
    Credit risk
    Sunk costs
    Investors

    Keywords

    • Financial discipline
    • Ownership
    • Performance
    • Transition

    ASJC Scopus subject areas

    • Economics and Econometrics

    Cite this

    Frydman, R., Gray, C., Hessel, M., & Rapaczynski, A. (2000). The limits of discipline: Ownership and hard budget constraints in the transition economies. Economics of Transition, 8(3), 577-601.

    The limits of discipline : Ownership and hard budget constraints in the transition economies. / Frydman, Roman; Gray, Cheryl; Hessel, Marek; Rapaczynski, Andrzej.

    In: Economics of Transition, Vol. 8, No. 3, 2000, p. 577-601.

    Research output: Contribution to journalArticle

    Frydman, R, Gray, C, Hessel, M & Rapaczynski, A 2000, 'The limits of discipline: Ownership and hard budget constraints in the transition economies', Economics of Transition, vol. 8, no. 3, pp. 577-601.
    Frydman, Roman ; Gray, Cheryl ; Hessel, Marek ; Rapaczynski, Andrzej. / The limits of discipline : Ownership and hard budget constraints in the transition economies. In: Economics of Transition. 2000 ; Vol. 8, No. 3. pp. 577-601.
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