An institutional perspective on corruption in transition economies

• Date: 01 May 2017
• Author: Amy M. Hageman,Anna Alon
• Published date: 01 May 2017
• DOI: http://doi.org/10.1111/corg.12199

SPECIAL ISSUE ARTICLE

An institutional perspective on corruption in transition

economies

Anna Alon

1

|Amy M. Hageman

2

1

University of Agder, School of Business and

Law, Kristiansand, Norway

2

Kansas State University, College of Business

Administration, Manhattan, Kansas, USA

Correspondence

Anna Alon, Professor, University of Agder,

School of Business and Law, Kristiansand,

Norway.

Email: anna.alon@uia.no

Abstract

Manuscript Type:Empirical

Research Question/Issue:Companies operating in transition economies encounter a broad

range of potential challenges. In the area of tax, firms make direct tax payments but may also

encounter unofficial tax costs in the form of bribery or extortion. We focus on institutional deter-

minants, including formal rules, informal rules, and enforcement, to examine conditions under

which firms are more likely to encounter these transactions. We operationalize formal rules as

rule‐based trust and informal rules as dispositional trust.

Research Findings/Insights:Based on a sample of over 5000 firms representing 20 transi-

tion economies, we show that when rule‐based trust is high, the presence of tax enforcement

activities in the form of visits and inspections by tax officials does not change the relationship

between rule‐based trust and unofficial payments. However, when dispositional trust is low,

unofficial payments are more likely if verification activities occur.

Theoretical/Academic Implications:We adopt a more holistic view and focus on the joint

consideration of different institutional determinants and firm outcomes. In doing so, the article

demonstrates the complexity of firms’tax environments where enforcement mechanisms can

have unwelcome consequences, and, under certain conditions, create conditions for the persis-

tence of corruption.

Practitioner/Policy Implications:This paper highlights the importance of the institutional

landscape, especially considering the history of institutional voids in many transition economies.

The results have implications for corporate governance and caution regulators and practitioners

to consider institutional complexities when implementing reforms or establishing businesses in

transition economies.

KEYWORDS

corporate governance, corruption, institutional theory, taxcompliance, transition economies

1|INTRODUCTION

In transition economies of the former Soviet Bloc, a transformation of

national institutions has occurred over the past 25 years. Until the late

1980s, these countries functioned as centrally‐planned economies

where state ownership and control were omnipresent. At the same

time, many transactions were handled through informal networks

where connections allowed access to services not broadly available.

Since then, some transition economies have moved to join the EU

while others have not made significant economic progress. National

institutions have been widely recognized as critical components in

explaining why some transition economies were able to make a suc-

cessful transition and others continue to flounder. One explanation is

that existing structures contribute to path‐dependency in business

practices even amid a push toward internationally‐accepted corporate

governance practices (e.g., Filatotchev & Boyd, 2009; Kumar & Zattoni,

2013; Yoshikawa & Rasheed, 2009).

North (1990) classified institutional determinants into three gen-

eral categories: formal rules, informal rules,

1

and the enforcement

characteristics of each. Formal rules, specifically laws and regulations,

have been extensively examined in the context of corporate gover-

nance. Studies evaluating institutional determinants tend to focus on

Received: 15 September 2015Revised: 12 December 2016Accepted: 19 January 2017

DOI: 10.1111/corg.12199

Corp Govern Int Rev. 2017;25:155–166.© 2017 John Wiley & Sons Ltdwileyonlinelibrary.com/journal/corg155