Why do Firms Hide? Bribes and Unofficial Activity After Communism

Our survey of private manufacturing firms finds the size of hidden "unofficial" activity to be much larger in Russia and Ukraine than in Poland, Slovakia and Romania. A comparison of cross-country averages shows that managers in Russia and Ukraine face higher effective tax rates, worse official corruption, greater incidence of mafia protection, and have less faith in the court system. Our firm-level regressions for the three Eastern European countries find that official corruption is significantly associated with hiding output.