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Underground Activity And Institutional Change: Productive, Protective And Predatory Behavior In Transition Economies

Author

Listed:
  • Edgar L. Feige

    (The University of Wisconsin-Madison)

Abstract

This paper examines why some transitions are more successful than others by focusing attention on the role of productive, protective and predatory behaviors from the perspective of the new institutional economics. Many transition economies are characterized by a fundamental inconsistency between formal and informal institutions. When formal and informal rules clash, noncompliant behaviors proliferate, among them, tax evasion, corruption, bribery, organized criminality, and theft of government property. These wealth redistributing protective and predatory behaviors activities absorb resources that could otherwise be used for wealth production resulting in huge transition costs. Noncompliant behaviors--evasion, avoidance, circumvention, abuse, and/or corruption of institutional rules--comprise what we can be termed underground economies. A variety of underground economies can be differentiated according to the types of rules violated by the noncompliant behaviors. The focus of the new institutional economics is on the consequences of institutions--the rules that structure and constrain economic activity--for economic outcomes. Underground economics is concerned with instances in which the rules are evaded, circumvented, and violated. It seeks to determine the conditions likely to foster rule violations, and to understand the various consequences of noncompliance with institutional rules. Noncompliance with ‘bad” rules may actually foster development whereas non compliance with “good” rules will hinder development. Since rules differ, both the nature and consequences of rule violations will therefore depend on the particular rules violated. Institutional economics and underground economics are therefore highly complementary. The former examines the rules of the game, the latter the strategic responses of individuals and organizations to those rules. Economic performance depends on both the nature of the rules and the extent of compliance with them. Institutions therefore do affect economic performance, but it is not always obvious which institutional rules dominate. Where formal and informal institutions are coherent and consistent, the incentives produced by the formal rules will affect economic outcomes. Under these circumstances, the rule of law typically secures property rights, reduces uncertainty, and lowers transaction costs. In regimes of discretionary authority where formal institutions conflict with informal norms, noncompliance with the formal rules becomes pervasive, and underground economic activity is consequential for economic outcomes.

Suggested Citation

  • Edgar L. Feige, 2003. "Underground Activity And Institutional Change: Productive, Protective And Predatory Behavior In Transition Economies," Development and Comp Systems 0305001, EconWPA.
  • Handle: RePEc:wpa:wuwpdc:0305001
    Note: Type of Document - pdf; prepared on IBM PC ; to print on HP/PostScript pdf file; pages: 20 . 20 pages pdf file
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    References listed on IDEAS

    as
    1. Feige, E.L., 1991. "Socialist Privatization," Papers 1a, United Nations World Employment Programme-.
    2. Feige, Edgar L., 1990. "Defining and estimating underground and informal economies: The new institutional economics approach," World Development, Elsevier, vol. 18(7), pages 989-1002, July.
    3. repec:taf:ceasxx:v:47:y:1995:i:4:p:555-589 is not listed on IDEAS
    4. Paolo Mauro, 1995. "Corruption and Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 110(3), pages 681-712.
    5. Vito Tanzi, 1994. "Corruption, Governmental Activities, and Markets," IMF Working Papers 94/99, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. François Gardes & Christophe Starzec, 2009. "Polish Households' Behavior in the Regular and Informal Economies," Revue économique, Presses de Sciences-Po, vol. 60(5), pages 1181-1210.
    2. K.P. Kannan & N. Vijayamohanan Pillai, 2001. "The political economy of public utilities: A study of the power sector," Centre for Development Studies, Trivendrum Working Papers 316, Centre for Development Studies, Trivendrum, India.
    3. World Bank, 2003. "Bosnia and Herzegovina : Poverty Assessment, Volume 1. Main Report," World Bank Other Operational Studies 14693, The World Bank.
    4. Jan Fidrmuc & Klarita G??rxhani, 2005. "Formation of social capital in Central and Eastern Europe: Understanding the gap vis-??-vis developed countries," William Davidson Institute Working Papers Series wp766, William Davidson Institute at the University of Michigan.
    5. Roberto Dell'Anno & Adalgiso Amendola, 2008. "Istituzioni, Diseguaglianza ed Economia Sommersa: quale relazione?," Quaderni DSEMS 24-2008, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia.
    6. repec:ilo:ilowps:355192 is not listed on IDEAS
    7. Sabine Bernabe, 2002. "Informal Employment in Countries in Transition: A conceptual framework," CASE Papers case56, Centre for Analysis of Social Exclusion, LSE.
    8. repec:aia:aiaswp:wp12 is not listed on IDEAS
    9. Alexander Smajgl, 2007. "Modelling evolving rules for the use of common-pool resources in an agent-based model," Interdisciplinary Description of Complex Systems - scientific journal, Croatian Interdisciplinary Society Provider Homepage: http://indecs.eu, vol. 5(2), pages 56-80.
    10. Alexander Smajgl, 2004. "Modelling the effect of learning and evolving rules on the use of common-pool resources," Computing in Economics and Finance 2004 178, Society for Computational Economics.
    11. McAllister, Ryan R.J. & Smajgl, Alex & Asafu-Adjaye, John, 2007. "Forest logging and institutional thresholds in developing south-east Asian economies: A conceptual model," Forest Policy and Economics, Elsevier, vol. 9(8), pages 1079-1089, May.
    12. repec:aia:aiaswp:wp8 is not listed on IDEAS
    13. Bernabe, Sabine, 2002. "Informal employment in countries in transition: a conceptual framework," LSE Research Online Documents on Economics 6389, London School of Economics and Political Science, LSE Library.
    14. Gerxhani, Klarita & Schram, Arthur, 2006. "Tax evasion and income source: A comparative experimental study," Journal of Economic Psychology, Elsevier, vol. 27(3), pages 402-422, June.
    15. repec:aia:aiaswp:wp32 is not listed on IDEAS
    16. Andrimihaja, Noro Aina & Cinyabuguma, Matthias & Devarajan, Shantayanan, 2011. "Avoiding the fragility trap in Africa," Policy Research Working Paper Series 5884, The World Bank.
    17. Fidrmuc, Jan & Gërxhani, Klarita, 2008. "Mind the gap! Social capital, East and West," Journal of Comparative Economics, Elsevier, vol. 36(2), pages 264-286, June.
    18. Klarita Gërxhani, 2007. "“Did You Pay Your Taxes?” How (Not) to Conduct Tax Evasion Surveys in Transition Countries," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 80(3), pages 555-581, February.
    19. Ekaterina Vostroknutova, 2003. "Shadow Economy, Rent-Seeking Activities and the Perils of Reinforcement of the Rule of Law," William Davidson Institute Working Papers Series 2003-578, William Davidson Institute at the University of Michigan.
    20. Pillai N., Vijayamohanan, 2008. "Power Sector Reform: Some Lessons for Kerala," MPRA Paper 12334, University Library of Munich, Germany.

    More about this item

    Keywords

    transition economies; underground economies; institutions; property rights; transaction costs; tax evasion; corruption; rent seeking.;

    JEL classification:

    • P2 - Economic Systems - - Socialist Systems and Transition Economies
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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