The Firm-Bank Interaction Regime and "Softness"

This paper is analyzing a dynamic evolutionary game of firm-bank interaction to underline the importance of the interaction regime for encouraging or discouraging soft-budget phenomena and financial disorder. The poor performance of public sector's firms, which led globally to quests for the contraction of that sector and privatizations, is viewed as an equilibrium situation, ascribed to the inadequate attention of policy to the interaction regime. Moreover, it is found out that the background of the transition economies is such as to require even at equilibrium, a regime fostering much stricter financial discipline than in the mixed economies. Finally, it is argued that the abandonment of central planning was a necessary condition, a prerequisite, for the removal of its softness.