ABSTRACT
In transition economies, which are plagued by congenital institutional fragility, the institutions/economic performance nexus has aroused increasing interest. This chapter emphasizes the lack of well-functioning institutions as a source of major economic disruption and failure of conventional fiscal policies. It assumes that the government has established an efficient tax collection institution and utilizes all the tax income to provide a public good. Production in a firm depends on its upstream input supply relationships. In a developed economy, these inputs are by and large traded on the global marketplace given low transaction costs. In transition economies, markets are segmented and less developed, so that production in one firm depends largely on the survival of its traditional suppliers. In this context, die tax system should take into account the firm's financial viability, since sound firms may be endangered if financially weak firms exit the market at once.
