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Rackets, Regulation, and the Rule of Law

  • Frye, Timothy
  • Zhuravskaya, Ekaterina

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. Copyright 2000 by Oxford University Press.

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Article provided by Oxford University Press in its journal Journal of Law, Economics and Organization.

Volume (Year): 16 (2000)
Issue (Month): 2 (October)
Pages: 478-502

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Handle: RePEc:oup:jleorg:v:16:y:2000:i:2:p:478-502
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  1. Philippe Aghion & Olivier J. Blanchard, 1994. "On the Speed of Transition in Central Europe," NBER Chapters, in: NBER Macroeconomics Annual 1994, Volume 9, pages 283-330 National Bureau of Economic Research, Inc.
  2. Johnson, Simon & Kaufmann, Daniel & Zoido-Lobaton, Pablo, 1998. "Regulatory Discretion and the Unofficial Economy," American Economic Review, American Economic Association, vol. 88(2), pages 387-92, May.
  3. Frye, Timothy & Shleifer, Andrei, 1997. "The Invisible Hand and the Grabbing Hand," American Economic Review, American Economic Association, vol. 87(2), pages 354-58, May.
  4. Hay, Jonathan R & Shleifer, Andrei, 1998. "Private Enforcement of Public Laws: A Theory of Legal Reform," American Economic Review, American Economic Association, vol. 88(2), pages 398-403, May.
  5. Zhuravskaya, Ekaterina V., 2000. "Incentives to provide local public goods: fiscal federalism, Russian style," Journal of Public Economics, Elsevier, vol. 76(3), pages 337-368, June.
  6. Berkowitz, Daniel & DeJong, David N., 1999. "Russia's internal border," Regional Science and Urban Economics, Elsevier, vol. 29(5), pages 633-649, September.
  7. Alston, Lee J & Ferrie, Joseph P, 1993. "Paternalism in Agricultural Labor Contracts in the U.S. South: Implications for the Growth of the Welfare State," American Economic Review, American Economic Association, vol. 83(4), pages 852-76, September.
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