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Eric S. Maskin: "Soft budgetary constraints" a decisive factor shaping economy's success or failure

DATE: 2024-04-27
VIEWS: 24

Eric S. Maskin:


The following is a summary of Eric S. Maskin's keynote address to attendees at the Sixth Annual Conference of Government and Economics held at Tsinghua University, Beijing, on April 27, 2024. Dr. Maskin is a 2007 Nobel Laureate in Economic Sciences, Adams University Professor at Harvard University
, and Co-President of SAGE.

On April 27, 2024, the Sixth Annual Conference of Government and Economics, co-hosted by the Society for the Analysis of Government and Economics (SAGE) along with Tsinghua University's School of Social Sciences and the Academic Center for Chinese Economic Practice and Thinking (ACCEPT), was convened on campus at Tsinghua University. Eric S. Maskin, 2007 Nobel Laureate in Economic Sciences, Adams University Professor at Harvard University
, and Co-President of SAGE, addressed attendees at the conference by exploring the issue of "soft budgetary constraints" in a keynote speech delivered online via video presentation.


Eric S. Maskin's speech focused on soft budgetary constraints and corporate financing. Soft budgetary constraints are one distinctive way in which financial constraints can fail, manifested when lending institutions encounter difficulties controlling the amount of loans issued to enterprises within a fixed budget, and with enterprises eventually receiving subsidies or loans exceeding expectations. He pointed out that in a centralized economy, funds are concentrated in one creditor, such as a bank or the government. Although some projects may not appear to be profitable from the outset, banks will still opt nonetheless to continue lending in order to obtain potentially high returns, which therefore leads to the problem of a soft budgetary constraint. In a decentralized economy, by contrast, banks and available funds become much more fragmented and dispersed, with individual banks unable to extend their lending and with no other banks willing to continue providing additional funds. This results in a situation where projects are unable to receive further rounds of funding, which therefore leads to a hard budgetary constraint. While soft budgetary constraints are a common feature of centralized economies, in decentralized economies such as today's China it is unlikely that such a problem would emerge.

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