Bureaucratic Control and the Soft Budget Constraint1.pdfVIP

JOURNAL OF COMPARATIVE ECONOMICS 26, 41–61 1998 ARTICLE NO . JE971506 Bureaucratic Control and the Soft Budget Constraint1 Chong-en Bai Boston College, Chestnut Hill, Massachusetts 02167 and Yijiang Wang Industrial Relations Center, Carlson School of Management, University of Minnesota, Minneapolis, Minnesota 55455 Received August 1, 1997; revised December 1, 1997 Bai, Chong-en, and Wang, Yijiang—Bureaucratic Control and the Soft Budget Constraint In the hierarchy of China’s state sector, both before and during the current reform period, government bureaucrats select and supervise state-owned enterprise SOE managers. The incentive problem of SOE managers has been studied carefully, but that of the bureaucrats has not. This paper uses a model to show that the agency problem of the bureaucrat leads to the persistence of the soft-budget constraint SBC in the state sector. This suggests that the problem of SBC is unlikely to go away even when other familiar reasons contributing to the SBC disappear, e.g., concern about employment. J. Comp. Econom., March 1998, 26 1 , pp. 41–61. Bolton College, Chestnut Hill, Massachusetts 02167; and Industrial Relations Center, Carlson School of Management, University of Minnesota, Minneapolis, Minnesota 55455. 1998 Academic Press Journal of Economic Literature Classi?cation Numbers: P31, P21, P26, D82. I. INTRODUCTION In China’s state sector, the hierarchy of control runs from the state to the industrial bureaus at different levels of the government and then to the state- 1 We thank John Bonin for very detailed and useful suggestions and participants at the 1997 Association for Comparative Economic Studies winter meetings for helpful comments. Partial ?nancial support provided to Wang by the University of Minnesota Faculty Summer Research Fellowship is gratefully acknowledged. 0147-5967/98 $25.00 41 Copyright 1998 by Academic Press All rights of r