Soft budget constraint refers to the failure of the organization (government or bank) that provides funds to the enterprise to adhere to the original business agreement, which makes the enterprise's capital utilization exceed the scope of its current income. This phenomenon is called "soft budget constraint" by Ianos Kornai (1986).

The generalized soft budget constraint means that when the expenditure of a budget constraint body exceeds the income it can obtain, the budget constraint body is not liquidated and goes bankrupt, but the supported body can continue to survive.

the hard constraint of financial budget means that the cash outflow of investors is strictly restricted by the cash inflow from activities such as selling products and services. If the cash outflow is greater than the cash inflow for a long time, the enterprise will go bankrupt due to insolvency.

Extended materials

The hardness of budget constraints depends on specific environmental conditions, that is, on social relations that require compliance with rules of conduct. Hard budget constraint means that the financial revenue and expenditure plan has a hard constraint on the behavior and freedom of action of enterprises; In other words, the survival of enterprises depends only on sales revenue and input cost, and the expenditure of enterprises must be constrained by the money stock and income of enterprises.

this constraint strictly restricts the enterprise behavior or constitutes a hard constraint on the freedom of enterprise behavior. Soft budget constraint means that the financial revenue and expenditure plan does not constitute an effective constraint on the behavior and freedom of action of enterprises. When an enterprise can't compensate its expenses with its own income, it can continue to survive.

assuming that we can know the prices (p1,p2) of two commodities and the total amount of money that consumers will spend m, the budget constraint of consumers can be written as follows: p1X1+p2X2 ≤ m

where p1X1 is the amount of money that consumers spend on commodity 1, and p2X2 is the amount of money that consumers spend on commodity 2. The budget constraints of consumers require that the amount of money spent on these two commodities should not exceed the total amount that consumers can spend. The consumer can afford those goods whose cost does not exceed m.

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