Working Paper: CEPR ID: DP2716
Authors: Timothy Frye; Ekaterina Zhuravskaya
Abstract: Governments that levy predatory regulation and provide few weak legal institutions draw businesses into the unofficial economy and compel them to hire private protection organizations. Based on a survey of shopkeepers in three cities in Russia, we find that retail shops face very high levels of predatory regulation and have frequent contacts with private protection rackets. In addition, we show that higher levels of regulation are associated with weaker legal institutions and a higher probability of contact with a private protection organization. We also find that shopkeepers view private protection organizations primarily as a substitute for state-provided police protection and state-provided courts. These results emphasize the importance of public sector reform as a component of economic transition.
Keywords: government; racket regulation; transition
JEL Codes: H39; K20; K42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher levels of regulatory burden (L51) | Likelihood of contact with private protection rackets (K42) |
| Each additional permit required (R48) | Likelihood of contact with private protection rackets (K42) |
| Each additional agency visited (Z31) | Likelihood of contact with private protection rackets (K42) |
| Higher levels of regulation (L59) | Efficacy of legal institutions (K40) |
| Efficacy of legal institutions (K40) | Reliance on private protection (P14) |