The Two Kornai Effects

Kornai's theories of a “soft budget constraint” study a firm that receives state assistance when expenses exceed revenues. Such assistance is characteristic of classical socialism. It is well known that Kornai contended that a soft budget constraint increases input demands. He also predicted a second effect that has received less attention: input demands exhibit lower price responsiveness. The Second Kornai Effect may be defined in terms of slopes of input demands as Kornai did, or in terms of elasticities. A simple soft budget constraint model is used to review the First Kornai Effect and to examine the two versions of the Second Kornai Effect.