A major difference between this concept and Kornai’s notion of soft budget constraints lies in the ex-ante attitude of creditors. While creditors (in particular, the state) explicitly bail out unprofitable firms (this information is available ex-ante), the adverse selection in the second case is due to imperfect information: if the relevant information had been available to the creditors ex-ante, they would have declined to finance the project altogether (Schaffer (1998)). In reference to long-term enterprise-bank relations in a transitional environment, it has been observed that relationship banking in imperfect markets may also involve moral hazard and may give rise.
