zeal, which requires firms to pay to avoid being charged with violations, or excessive sloth, requiring firms to pay to receive services. In either case, corruption represents additional costs to firms tied to regulatory enforcement. It is worth noting, however, that the negative effects associated with excessive regulatory burdens goes hand-in-hand with high levels of corruption empirically. This suggests that regulation is only problematic for investment when rent-seeking officials abuse regulatory burdens for self-enrichment using informal practices such as bribe-taking (Eiffert 2009).

# **Box 1: Uncertainty from violation of formal rules and regulations by authorities.**

One more potentially important source of regulatory uncertainty for firms could stem from the violation of formal rules and regulations by authorities. These could be e.g. violation of time limits, or limits in number of required procedures prescribed by formal rules and regulations. If _de jure_ rules and regulations are not necessarily obeyed by authorities, this constitutes not only additional costs, but also additional uncertainty for the business. While we are not concerned with regulatory uncertainty stemming from formal, written rules in our main paper, we did examine whether uncertainty in these rules mattered for investment.

We tried to estimate this type of uncertainty for Russian firms using World Bank Doing Business 2012 and BEEPS 2012 data for Russian regions. Our idea was to compare Doing Business and BEEPS data for the number of days required to get a construction permit or to obtain electrical connections in Russian regions. While Doing Business data represents _‘de jure’_ written regulations, BEEPS data reflect the situation _‘de facto’_ in the regions. Yet, the data indicate that, at least with respect to time required to get construction permits or to obtain electricity connection, no systematic violation of ‘de jure’ rules is observed in Russian regions. Only in 4 out of 26 regions covered by the data on the number of days needed to get a construction permit did _de facto_ measures exceed the _de jure_ number of days. The same situation occurs for electrical connections. Graphs A1 and A2 in the Annex provide the comparison of _de jure_ and _de facto_ number of days required to get construction permits and electricity connection in Russian regions to illustrate this. Consequently, we do not believe that the comparison of Doing Business and BEEPS Russian Regions data reflects regulatory uncertainty in the way we theorize it in this paper, because formal rules and regulations do not appear to be being violated by authorities. If anything, these data suggest firms may be more likely to invest due to uncertainty having upside risks. This, of course, is not to say that Russian firms do not face negative uncertainty linked to formal regulation. Nonetheless, in absence of new data sources, we cannot measure the extent of negative uncertainty linked to formal regulations.

To measure the level of corruption, we make use of the two variables that draw on the same question about the percentage of annual sales spent on bribe payments taken from questions on the RR BEEPS 2012 survey.<sup>10</sup> The first, “bribe incidence” is the share of regional firms (for each region) that reported paying some percentage and those answering “don’t know” and measures how common bribery is in the region.<sup>11</sup> The second measure is the regional mean value of bribes paid by firms reporting that they paid bribes, “bribe tax”, which measures

> 10 The RR BEEPS question read as follows: _“It is said that establishments are sometimes required to make gifts or informal payments to public officials to” get things done” with regard to customs, taxes, licenses, regulations, services, etc. On average, what percentage of total annual sales, or estimated total annual value, do establishments like this one pay in informal payments or gifts to public officials for this purpose?”_

> 11 We pool positive answers and “don’t know” responses together under the assumption that asking firms directly about the size of bribes they pay is a sensitive question and that “don’t know” responses mask genuine fear of admitting to paying bribes.

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