Violent Pressure on Business and the Size of the Informal Economy: Evidence from Russian Regions

Abstract: Does violent pressure on business influence the decision of firms to stay in the informal economy? Using evidence from Russian regions, this papers finds that the result depends on the type of violence. Physical violence in a given region is positively correlated with the number of people working outside the corporate sector, but negatively with the degree of competition from the informal sector. On the other hand, insecure property rights for entrepreneurs and investors increase the amount of competition from the informal economy. These findings are consistent with a theory where firms seek the protection of the formal economy against different types of physical violence in regions with decentralized predation, but hide in the informal economy against predatory state officials and corporate raiders in regions where predation is centralized.