the costs of corruption. We assume that where regulatory burdens are excessively high, and generate high costs for firms, firms will try to reduce regulatory burden by using extra legal channels in order to obtain relief. Therefore, high corruption (gifts or informal payments to public officials to “get things done”) reflects high regulatory burden in a given region.

The work on regulatory uncertainty reviewed above likewise generates fairly simply predictions: high regulatory uncertainty increases the volatility of policy and increases firms’ fears of negative shocks, this decreases incentives to invest. Thus:

# **<u>Hypothesis 2: The greater the degree of regulatory uncertainty for firms, the less likely they are to</u> invest.**

As discussed above, however, the sources of regulatory uncertainty have important implications for both theory and policy. Regulatory uncertainty stemming from informal institutions and practice has gone particularly underexplored in existing work. In this paper, we therefore propose two sub-hypotheses that explore specific facets of informal institutions and their relationship to investment:

# **<u>Hypothesis 2.a: Variation in intra-regional use of informal payments/procedures creates uncertainty</u> over when, and for whom, regulations will be enforced and government services provided. Intraregional variation in informal payments should decrease investment.**

Recall that in our discussion of existing work above we point to an important distinction in the literature between centralized and decentralized administrative corruption. In the former case, centralized authorities (at the federal level, regional level, or both) can impose limits and boundaries on bribes to officials, constraining competition to extract rents and regulating the ways and amounts that officials can demand. In such settings, we would expect that the bribe demanded for any given government service is predictable, regardless of the actual size of the bribe demanded or how many firms pay them. In the latter case, however, the lack of a higher authority to provide constraints mean that officials may set bribes at any level that they desire and the market can bear.

As no central authority coordinates these actions, different bureaucrats are likely to demand different bribes – depending on their evaluations of the market – and the bribes needed to secure services should become more unpredictable. The unpredictable nature of such corruption, in turn, creates uncertainty about regulatory enforcement, since firms are unsure of who will be forced to make informal payments, for how much, and to whom in order to receive basic services. Whereas differences in _de jure_ and _de facto_ law can arise for benign reasons, such as changing regulator priorities or differing interpretations across regions, however, variation in corruption stems mostly from the desire of officials to rent-seek and the inability (or unwillingness) of higher level officials to centralize these practices. In other words, variation in administrative corruption takes on the form of a direct, predatory cost of doing business.

To approximate regulatory uncertainty we computed the regional variation of “bribe tax” or the percentage of annual sales spent on bribe payments taken from questions on the RR BEEPS 2012 survey from those firms that answered the question.<sup>12</sup> Our indicator is calculated as a standard deviation of the aggregate bribe tax

> 12 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?”_

13