Input Demand Analysis Based On The Soft Budget Constraints

From the second half year of 2003, investment in fixed assets became overheated. The characters it presented can't be well explained by traditional economic theory. First, the rise of energy price does not slow down investment efficiently; second, the effect of economy measure is undesirable; third, the overheating is partial, not overall. Essentially, investment of enterprises is the behavior of input demand. This paper analyzes the questions above from the angle of input demand.Traditional input demand theory all assumes that enterprise is sensitive to price and neglects the affect of budget constraint. Kornai Effect shows, input demand elasticity is different between enterprises with different budget constraints and soft budget constraint causes an increase in input demand. The available literatures on Kornai Effect mainly focus on the level of enterprise. This paper introduces the theory of soft budget constraint into traditional input demand theory, and analyzes the effect of soft budget constraint on the equilibrium of input market and interactions between enterprises with different budget constraints.Through deduction, we reach three theorems: (1) as the budget constraint of an enterprise softens, its input demand increases, sensitivity to price falls and the slope of input demand function gets gradual; (2) the softening of the budget constraint of an enterprise leads to a rise in both equilibrium price and demand; (3) enterprise with soft budget constraint has a crowding out effect on the input demand of enterprise with hard budget constraint. Further, we give two suggestions on our economic reform: (1) administrative interference can make a better distinction between enterprises with different budget constraints and its effect is better effect when there're different types of enterprises, so appropriate administrative interference is necessary; (2) the existence of soft budget constraint leads to low efficiency of market in resource allocation, so it is the precondition to harden budget constraint for market mechanism to work. Finally, we test the conclusions we have reached with the phenomenon in our economy area.