What distinguishes soft capital rationing from hard capital rationing?

Soft capital rationing is characterized by internal constraints imposed by management rather than external factors. This form of capital rationing arises from the company’s own policies, such as limits on investment spending or prioritizing certain projects over others, reflecting strategic decisions made within the organization.

Internal decisions may stem from a desire to manage risk, maintain control over resource allocation, or fulfil specific financial targets. In contrast, hard capital rationing typically results from external limitations, such as a lack of access to financing or adverse economic conditions, which can constrain a firm’s ability to obtain funds for investment.

The distinction lies primarily in the source of the constraints: soft capital rationing is internally motivated, aligning with the company’s management philosophy and strategic planning, while hard capital rationing involves circumstances beyond the company’s control, like market conditions or investor willingness to provide capital.