Formal and informal institutions in the Western Balkans: who does what and why?

This talk will provide an overview of my research on tax evasion and undeclared work in the former communist countries. My main contribution is both theoretical and empirical. From an institutional perspective, I argue that for a better comprehension of noncompliant activities, one should consider both formal and informal institutions simultaneously. Doing so is particularly relevant for the Western Balkan countries, because institutional change has been a defining feature of their economies, hence “any inquiry into the causes and ultimate consequences of the transition must include an analysis of the incentives and sanctions governing various types of underground economic activities” (Feige, 1997). Empirically, I combine observational with laboratory data and examine the role of individuals’ attributes and attitudes about institutions on their engagement in informal activities, as well as the outcome of such engagement. My main conclusion is that people’s experience with the governing formal and informal institutions have important repercussions for the economy - a large informal sector; for the state - large budget deficits and hence lower investments in public goods; for personal well-being; and finally, for the overall society via institutional trust and social capital.