Working Paper: CEPR ID: DP2950
Authors: Fabrizio Coricelli; Simeon Djankov
Abstract: We identify the presence of soft budgets and analyse their impact on enterprise restructuring in Romania over the initial transition period. A simple analytical framework is developed to show that hardened budget constraints foster rationalization of costs, but not active restructuring. The latter requires availability of external financing. The model emphasises the importance of the credibility of hard budgets. The empirical findings are consistent with the predictions of the model. Using a sample of over 4,000 Romanian enterprises during 1992-95, we show that hardened budget constraints induce labour shedding. There is no evidence of positive effects on active restructuring, which we define as new investments.
Keywords: Romania; soft budgets
JEL Codes: G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| hardened budget constraints (H60) | labor shedding (J63) |
| external financing (G32) | active restructuring (E69) |
| credibility of hard budgets (H61) | enterprise behavior (D22) |
| tightening bank credit (G21) | efficiency (D61) |
| tightening bank credit (G21) | investment opportunities (G24) |
| hardened budget constraints (H60) | active restructuring (E69) |