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  • 1 Chief Economist at the European Bank for Reconstruction and Development (EBRD), Professor of Economics at the Institut d’études politiques de Paris (Sciences Po) and Research Fellow at the Centre for Economic Policy Research (CEPR). The views presented here are those of the author and not necessarily of the EBRD
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I consider the application of János Kornai’s soft budget constraint (SBC) concept to the state capitalist economy. I argue that interaction of SBC with agency problems within the government bureaucracy helps explaining a major feature of state capitalism – failure to privatize underperforming state-owned enterprises (SOEs). Bureaucrats supervising the failing SOEs prefer to keep them afloat and gamble for resurrection; in contrast, privatization would involve recognizing the loss, which would result in acknowledging the bureaucrat’s failure that is disincentivized by the state. This endogenously emerging preferential treatment of state-owned firms creates a competitive advantage against private firms; this explains why in state capitalism privatization may result in lower rather than higher productivity and therefore remain unpopular.

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