An organisation confident of rescue does not economise, so the expectation of bailout is itself the distortion.
Kornai's 1979 term from socialist enterprises, and it applies directly to too-big-to-fail banking. The expectation of rescue is the distortion, so it operates before any rescue occurs.
In practice
- A university that has never let a department run out of money finds every department planning on the assumption that it never will.
- A division that has been bailed out twice by head office budgets less carefully than one that has not, and no one has promised anything.
- Further reading
- Wikipedia
- Subject
- Economics & Incentives
- Essay
- The theories behind every argument about money