Soviet Shadow Economy and Post-Soviet Political Preferences: Evidence from Georgia

I study the long-run effect of the Soviet shadow economy on attitudes toward the market and state ownership of firms. I concentrate on Georgia – a former Soviet republic known for high prevalence of shadow economy. I use density of Soviet-era organized crime as a proxy for local prevalence of shadow economy and instrument it with agroclimatic suitability for citrus fruits, exploiting the fact that citrus and other subtropical agricultural products were an object of shortage and illicit trade during the Soviet era. Using this strategy, the citrus-suitable parts of Georgia have higher density of the Soviet-era thieves in law, and survey respondents living in them are more likely to report lower preference towards state ownership of business and higher appreciation of competition. Higher social legitimacy of private entrepreneurship is likely to be behind these findings: employed respondents in citrus-producing areas rate fairness of their compensation higher than in the rest of Georgia when they have their own business and lower – when they work in the public sector.