Bundling of Social and Private Goods and the Soft Budget Constraint Problem

Posted: 9 Sep 2005

See all articles by Lars-Hendrik Röller

Lars-Hendrik Röller

ESMT European School of Management and Technology; Centre for Economic Policy Research (CEPR); WZB Berlin Social Science Center - Competitiveness and Industrial Change

Zhentang Zhang

DIW Berlin, German Institute for Economic Research

Abstract

Firms in socialist and transitional economies are often obliged to provide social goods at the same time that they are competing with private firms. This paper analyzes the impact of such bundling on the provision of private and social goods focussing on the inability of politicians to commit not to bail out firms experiencing financial trouble. This soft budget constraint problem results in firms not becoming efficient in the private goods market. We show that more competition in the private goods market can lead to less efficiency in such environments. As a potential solution to the soft budget constraint problem, we consider unbundling, i.e., the separation of social good provision from the private good, and analyze the benefits and the costs.

JEL Classification: L13, L30

Suggested Citation

Röller, Lars-Hendrik and Zhang, Zhentang, Bundling of Social and Private Goods and the Soft Budget Constraint Problem. Journal of Comparative Economics, Vol. 33, No. 1, pp. 1-218, March 2005, Available at SSRN: https://ssrn.com/abstract=795284

Lars-Hendrik Röller (Contact Author)

ESMT European School of Management and Technology ( email )

Schlossplatz 1
Berlin, 10178
Germany

HOME PAGE: http://www.esmt.org/eng/faculty-research/lars-hendrik-roeller/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

WZB Berlin Social Science Center - Competitiveness and Industrial Change ( email )

Reichpietschufer 50
10785 Berlin
Germany
+49 30 2549 1440 (Phone)
+49 30 2549 1442 (Fax)

Zhentang Zhang

DIW Berlin, German Institute for Economic Research ( email )

Mohrenstraße 58
Berlin, 10117
Germany

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