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American Economic Review, 84(1):145-156, March, 1994.
This paper attributes shortages of goods in socialist economies to the soft financial constraints that firms in such economies face. A "soft budget constraint" problem arises when the state-bank is unable to make a credible commitment not to refinance bad projects once some investment costs are sunk. In such a situation, if a consumer good is also demanded by firms as an input and the seller cannot separate firms from households, the high market-clearing price would lead to welfare losses because too many bad projects would start and crowd out household consumption.