Research On The Soft Budget Constraint: A Multitask Perspective

State-owned enterprises (SOEs) act as an instrumentality for the government participating in and intervening in the economy to solve the problem of market failures. The goals of government can usually be separated into two categories– the economic goal and the non-economic goal. Therefore, all the tasks of SOEs can be classified into two kinds– the operation task for economic goals and the policy task for non-economic goals. The existence of multitask for the SOEs makes it difficult to measure the managers'performance, which leaves space for opportunism behaviors. Managers may tend to make fewer efforts on the unobservable operation task and ascribe uncompleted tasks to the burden of policy tasks. Since policy tasks, which SOEs might not be willing to take, are appointed by the government, when the payoff of policy tasks for the government is high enough, the government has to endure managers shirking the operation tasks. The government may have to support SOEs running under deficit, which raises the problem of the soft budget constraints. The improper incentives and constraints lead to the inefficiency, where the government realizes limited social goals while satisfying large economic benefits.The paper analyzes incentive mechanism of multitasking SOEs by the principal-agent model as well as the relation between multitasking and soft budget constraints of SOEs by the dynamic game model.To realize all the goals of the government, the first problem to solve is the allocation of tasks between SOEs, and the second action is to design compatible incentive measure to ensure managers'effort on tasks.Only if the efforts on each task can be measured accurately, should the incentives and constraints be efficient. Taking multiple tasks with one of them hard to observe, managers'should not be given excess incentives on other tasks. To solve the problem of shirking, the tasks should be assigned to different entities or there should be appropriate incentives.When SOEs managers'efforts on operation tasks are hard to supervise and enhancing the efforts on policy tasks increases the cost of efforts on operation tasks, the tasks should be separated to avoid the problem of soft budget constraints. At the same time, tight constraints on the government finance will also harden the budget constraints of SOEs.