Institutional and economic circumstances squeezing small business out of Russia''s formal economy
The authors use the theory of transaction costs and parts of the economic theory of crime and punishment to gain an insight into why small and medium-scale business in Russia tends to operate outside the formal sector of the country''s economy. A detailed classification of legitimate and illegitimate costs is given, assessing each legitimate cost as a cost to be shaken-off by going into the shadow economy. It is argued that each business possesses an innate ability to find its optimum degree of legitimacy, which depends on its institutional and economic circumstances. The authors treat the existence of this ability as an objective economic law. The empirical data support the view that Russia''s institutional and economic environment stays unchanged in that it pushes small business activity into the informal sector. The data presented also illustrate the vast scope of informal small and medium-scale business activity in Russia. The authors propose a set of priority measures to combat economic crime in the small business sector.