Does Protection Harden Budget Constraints?
LICOS Working Paper No. 98/2001
Posted: 8 Jun 2001
Date Written: February 2001
Abstract
In this paper we analyse the effects of soft budget constraints in an international context. Firstly, we show that soft budget constraints in an exporting country lead to higher levels of trade protection in the recipient country. Secondly, the model predicts that protectionist trade policy helps to harden budget softness in the exporting country. We therefore argue that, when industrial policy fails to enforce financial discipline, trade policy can take over this role. Finally, we suggest potential avenues for future empirical research.
Keywords: Soft Budget Constraints, Transition, Trade Policy, Oligopoly
JEL Classification: F13, L13
Suggested Citation: Suggested Citation