of the revenues thus generated, will generally be impossible.
In all but a limiting case
probably not reflective of empirical reality, states will provide more support to economic
activity from which they find it easier to extract revenues. Further, empirical evidence from
postcommunist states suggests that the more insidious form of contract failure — when the
state is unable to commit to leaving producers with a share of their unhidden production
— contributes to the large observed variation in the degree to which firms face a supportive
business environment.
In so doing, the theoretical and empirical work here has suggested a number of avenues for
future research. Most obviously, it would be interesting to explore the extent to which the
findings here hold in other political-economic contexts. In particular, one might imagine a
different distribution of outcomes in countries where for historical reasons the state is better
able to commit and has more experience in taxing private economic activity.
That in turn suggests that it would be fruitful to track changes over time in postcommu-
nist countries. It is certainly within the spirit of the transactions-cost literature to expect
that institutions will evolve to minimize the contract failures identified in this paper.
Finally, it is worth noting that this paper has abstracted from what are in reality sub-
stantial differences across countries in the nature of tax systems and revenue sharing among
different levels of government. The latter point is likely to be especially important to the
degree that it is local officials who are largely responsible for creating a more or less positive
business environment, and for whom the tax return to support of economic activity is conse-
49
Convention