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Sticks or Carrots? Comparing Effectiveness of Government Informal Economy Policies in Russia

  • Janis N. Kluge
  • Alexander Libman
Article

Abstract

Which incentives have the strongest impact on the size of the informal economy? Is it about government’s pressure against entrepreneurs operating in this sector, or is it about the benefits of legality? The goal of this paper is to explicitly contrast the role of sticks (court repressiveness) and carrots (financial aid to small- and medium-sized firms) as factors determining the size of the informal economy, using the case of the Russian taxi market. It uses a unique dataset of taxi licensing data from regional transport departments and indicators for taxi market demand and supply to estimate the extent of informal business. When controlling for market demand and supply, it finds a strong and robust positive effect of sanctions on the size of the official market, with higher repressiveness leading to a smaller informal economy. In contrast, the effect of carrots was insignificant. The results suggest that the effectiveness of carrot policies is compromised when entrepreneurs operate informally to avoid dealing with corrupt bureaucrats and have low trust in the government.

Keywords

Informal economy Bureaucracy Corruption Development policy 

JEL Classification

D73 D78 O17 

Notes

Acknowledgements

The study has been funded within the framework of the Basic Research Program at the National Research University Higher School of Economics (HSE) and by the Russian Academic Excellence Project “5-100”. We appreciate the very helpful suggestions of three anonymous referees. All mistakes are our own.

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© Association for Comparative Economic Studies 2018

Authors and Affiliations

  1. 1.German Institute for International and Security Affairs SWPBerlinGermany
  2. 2.Witten/Herdecke UniversityWittenGermany
  3. 3.Institute of SociologyLudwig Maximilians University of MunichMunichGermany
  4. 4.ICSIDNational Research University Higher School of EconomicsMoscowRussia

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