Do firms in transition have soft budget constraints ?

This paper first examines various definitions of Kornai’s soft budget constraint (SBC) and the difficulties involved in interpreting data on losses, subsidies and financing, and then considers selective evidence from transition economies. Stocks of overdue trade credit are no larger than in Western economies and firms in transition economies (TEs) typically impose hard budget constraints on each other. Banks have not been a systematic source of SBCs as often as is sometimes argued on the basis of data on classified loans; in 1992 Hungarian banks were imposing hard budget constraints on firms at the same time that they were classifying large volumes of their loans as bad. Tax arrears have emerged as a major source, and in the rapidly reforming TEs, the major source, of SBC’s. JEL classification: P31, P34, G21, G30.