How do informal institutions influence the formation and function of formal institutions? Existing typologies focus on the interaction of informal institutions with an established framework of formal rules that is taken for granted. In transitional settings, such typologies are less helpful, since many formal institutions are in a state of flux. Instead, using examples drawn from postcommunist state development, I argue that informal institutions can replace, undermine, and reinforce formal institutions irrespective of the latter's strength, and that the elite competition generated by informal rules further influences which of these interactions dominate the development of the institutional framework. In transitional settings, the emergence and effectiveness of many formal institutions is endogenous to the informal institutions themselves.How do informal institutions influence the emergence and function of formal institutions? Further, how do we account for the variation in formal institutions of the market, state, and democracy in post-communist countries? Post-communist democracies show surprising variation in the emergence and enforcement of their formal market and state institutions, which cannot be easily explained by historical legacies, formal institutional deficits, or external influence alone. The development of these post-communist formal rules demonstrates the mechanisms of informal influence on the emergence and transformation of formal institutions. This influence is direct: informal institutions serve as templates and substitutes for formal choices. Even as they compensate for formal institutions, informal rules can subvert them. Informal institutions also reify formal rules by defining and expanding their domain, and by providing incentives and information to follow formal institutions. The effect is also indirect: informal institutions shape elite competition and cooperation, which St Comp Int Dev (2010) 45:311-333