DP2950 Hardened Budgets and Enterprise Restructuring: Theory and an Application to Romania

Author(s): Fabrizio Coricelli , Simeon Djankov

Publication Date: September 2001

Keyword(s): soft budgets , romania

JEL(s): G34

Programme Areas: Transition Economics

Link to this Page: www.cepr.org/pubs/dps/DP2950.asp

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.