Rackets, regulation, and the rule of law

Governments that levy predatory regulation and provide few weaklegal institutions draw businesses into the unofficial economyand compel them to hire private protection organizations. Basedon a survey of shopkeepers in three cities in Russia, we findthat retail shops face very high levels of predatory regulationand have frequent contacts with private protection rackets.In addition, we show that higher levels of regulation are associatedwith weaker legal institutions and a higher probability of contactwith a private protection organization. We also find that shopkeepersview private protection organizations primarily as a substitutefor state-provided police protection and state-provided courts.These results emphasize the importance of public sector reformas a component of economic transition.