Does Protection Harden Budget Constraints?

LICOS Working Paper No. 98/2001

Posted: 8 Jun 2001

See all articles by Greetje Everaert

Greetje Everaert

KU Leuven - Centre for Institutions and Economic Performance (LICOS)

Hylke Vandenbussche

Catholic University of Leuven (KUL), CEPR

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

Everaert, Greetje and Vandenbussche, Hylke, Does Protection Harden Budget Constraints? (February 2001). LICOS Working Paper No. 98/2001, Available at SSRN: https://ssrn.com/abstract=272139

Greetje Everaert (Contact Author)

KU Leuven - Centre for Institutions and Economic Performance (LICOS) ( email )

Waaistraat 6 - box 3511
Leuven, 3000
Belgium

Hylke Vandenbussche

Catholic University of Leuven (KUL), CEPR ( email )

Faculty of Economics
Naamsestraat 69
B-3000 Leuven, 3000
Belgium
+32 16 326 920 (Phone)
+32 16 326 732 (Fax)

HOME PAGE: https://www.sites.google.com/site/vandenbusschehylke/home-1

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