Question

When the formal regime in the country of Zoalia collapsed, the growth of many entrepreneurial firms was facilitated by informal constraints based on personal relationships and connections among managers and officials. This is an example of _____.​
a) informal constraints providing constancy for managers and firms in situations where formal constraints are unclear
b) firms’ behavior being exclusively controlled by formal institutions
c) firms’ behavior being exclusively controlled by informal institutions
d) informal constraints increasing uncertainty for managers and firms in situations where formal constraints are unclear

Answer 1

Answer:

The answer is D) informal constraints increasing uncertainty for managers and firms in situations where formal constraints  are unclear.

Explanation:

When you don´t have formal restraints and the same rules that apply for all, uncertainty among managers and their firms will increase.

This is a clear example of corruption taking place in a country where formal institutions or governments have collapsed or have been overthrown and the "new leaders" benefit from the situation. In this case the companies or firms which are "friendly" to the new government will flourish because no formal institutions or constraints remain. Instead they are replaced by informal constraints setup to favor specific firms and companies. That means that the "new leaders" may establish new rules for the companies or firms to follow at their will in order to favor whoever they want.

This may benefit the "new leaders" and their "friends" but it hurts all the other companies and firms. In order for a company to keep on doing business as usual, or get a new contract or license, it will probably need to become friends with the new regime and that usually means payments and other types of bribes.