Public Organization Review

, Volume 18, Issue 1, pp 71–92 | Cite as

Understanding Public Sector Debt: Financial Vicious Circle under the Soft Budget Constraint

  • Sanghee ParkEmail author


The article explains why debt of public sector organizations grows beyond the sustainable level by focusing on the principal-agent relationship under the soft budget constraint. Specifically, this article explores the extent to which factors affect the level of public sector debt in the context of quasi-autonomous non-governmental organizations (quangos) in Korea over the past two decades (1993–2012). The findings from the panel data analysis suggest that the level of public sector debt increases as an outcome of the financial vicious circle created by the soft budget constraint: a knock-on effect of the moral hazard of quangos as well as the opportunistic behavior of political principals. Public sector debt is positively associated with agency-specific factors as well as the factors related to the political incentives such as policy preferences and electoral considerations. However, macroeconomic factors made little difference to the general pattern of the evidence.


Public sector debt Soft budget constraint Principal-agent relationship Quangos Arms’ length agencies 


Compliance with Ethical Standards


This work was supported by the National Research Foundation of Korea Grant funded by the Korean Government (NRF-2013S1A5B5A07045822).


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Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  1. 1.Department of Public Policy and Administration, School of Public ServiceBoise State UniversityBoiseUSA

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