Over the past decade, the repressive legal and regulatory environment in transition economies has received considerable attention in the literature. In Russia, this framework has resulted in an environment in which rules and regulations govern almost all aspects of economic activity. The elaborate system of regulations with which firms must comply, in combination with a lack of accountability for regulatory enforcers, has created a corrupt cadre of government officials who frequently engage in rent-seeking behavior while monitoring and enforcing firm compliance. The objective of this paper is to investigate the manner in which corruption affects micro and small enterprises in Russia. Empirical evidence suggests that micro and small enterprises vary substantially in reporting how problematic corruption is for their enterprise. A theoretical model explores why extortion from regulators may occur in a non-uniform manner across firms. The theoretical model postulates that government regulators customize the nature of their rent-seeking activities towards, similar to a price-discriminating monopolist facing hidden information. The model shows that production technologies, input choices, and other firm characteristics such as location play a role in determining the bribe price that a regulator will charge a firm, as well as the number of times he will return to collect it. Supportive evidence comes from survey data collected on Russian microenterprises. The model described above is tested using econometrics, and numerical simulations.


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