Transparency, Contracting Frictions, and Trade: Evidence across Firms

Abstract

Firms engage in off-the-books activities to avoid taxes and government oversight. We conjecture, however, that hidden transactions also increase a firm’s opacity, which leads to ex ante contracting frictions that may be particularly costly when trading partners have little legal recourse for contract abrogation. We study these tradeoffs using Russian firm- and transaction-level data. Consistent with hidden transactions leading to higher contracting frictions, we show that firms with more off-the-books activities tend to be in low contract intensity industries and are less likely to participate in import/export transactions. Conditional on engaging in international trade, off-the-books firms are more likely to trade in homogeneous products in which quality is easier to identify.