We extend research on informal economic activity and investigate why organizations adopt informal rules when formal ones exist and how and why patterns of defiance vary across organizations. We build on data from an in-depth study of four organizations operating in the Nigerian movie industry. We identify ambiguity of formal institutions as a major source of organizational defiance. We also find that the organization's domain of embeddedness mediates the relationship between institutional ambiguity and organizational defiance. According to our analysis, the rationale for organizing propelled by the dominant domain of embeddedness affects whether organizations consistently or selectively defy ambiguous formal rules. Our findings highlight the importance of the interplay between institutional and organizational dynamics in understanding informality within an economy. Copyright © 2014 Strategic Management Society.