Abstract
Laws that work well in developed market economies may produce unexpected outcomes in a corrupt environment. Once a legal institution is formally in place, it might be subverted by those who control its day-to-day operations. This paper focuses on the institution of bankruptcy to provide a case study of institutional subversion in a transition economy. The firm-level data analysis shows that Russia's bankruptcy law of 1998 did not result in improving managerial budget constraint. Instead of removing weak management and closing down loss-making enterprises as intended, it initiated a wave of inefficient property redistribution controlled by regional political elites.
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