State-Owned Enterprises, Soft Budget Constraints and the Owner-Regulator Syndrome

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Abstract:

We look at the soft budget constraint literature in the context of the state-led restructuring of state-owned enterprises (SOE) in which institutions are both regulators charged with constraining SOE restructuring outcomes and part owners of the SOEs concerned. Such institutional agents constitute a set of what we term “owner-regulators (OR)”. These economic agents may have political problems as regulators - as suggested by the Chicago School approach to economic regulation. They can also have ownership problems - here defined by literature on the theory of the firm and on vertical structure. In this light the incentives associated with the imposition of hard budget constraints may be by themselves insufficient to radically change owner-regulator behaviour. If the implementation of such constraints does not take into account the factors highlighted by this paper, hard budget constraints are likely to be either counterproductive or irrelevant.

Keywords: corporate governance; regulatory policy; state enterprise restructuring; transition economies

Document Type: Research Article

Publication date: July 19, 2002

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