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A tale of two species : revisiting the effect of registration reform on informal business owners in Mexico

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  • Bruhn, Miriam

Abstract

Different views have been put forward to explain why most firms in developing countries operate informally. One view argues that informal-business owners are entrepreneurs who do not register their firm because the regulation process is too complex. Another argues that informal-business owners are people trying to make a living while searching for a wage job. This paper contributes to recent literature that argues that both factors are at work. The author uses discriminant analysis to separate informal business owners into two groups: those with personal characteristics similar to wage workers, and those with traits similar to formal-business owners. The paper then examines how the two groups were affected by a business registration reform in Mexico. Informal-business owners from the second group were more likely to register their business after the reform. By contrast, informal-business owners from the first group were less likely to register but more likely to become wage workers after the reform. This is consistent with the finding in Bruhn (2008 and 2011) that the reform led to job creation. It also explains why the earlier papers find that the reform didn’t affect the number of new registrations by all informal business owners.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5971.

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Date of creation: 01 Feb 2012
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Handle: RePEc:wbk:wbrwps:5971

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Keywords: Competitiveness and Competition Policy; Business in Development; Business Environment; E-Business; Access to Finance;

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References

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  1. David Kaplan & Eduardo Piedra & Enrique Seira, 2007. "Are Burdensome Registration Procedures an Important Barrier on Firm Creation? Evidence from Mexico," Working Papers 0701, Centro de Investigacion Economica, ITAM.
  2. Simeon Djankov & Edward Miguel & Yingyi Qian & Gérard Roland & Ekaterina Zhuravskaya, 2005. "Who are Russia's Entrepreneurs?," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 587-597, 04/05.
  3. Chang-Tai Hsieh & Peter J. Klenow, 2007. "Misallocation and Manufacturing TFP in China and India," Discussion Papers 07-006, Stanford Institute for Economic Policy Research.
  4. Bruhn, Miriam, 2008. "License to sell : the effect of business registration reform on entrepreneurial activity in Mexico," Policy Research Working Paper Series 4538, The World Bank.
  5. Stephane Straub, 2004. "Informal Sector: The Credit Market Channel," ESE Discussion Papers 101, Edinburgh School of Economics, University of Edinburgh.
  6. Mariano Bosch & William Maloney, 2006. "Gross Worker Flows in the Presence of Informal Labor Markets. The Mexican Experience 1987-2002," CEP Discussion Papers dp0753, Centre for Economic Performance, LSE.
  7. Maloney, William F., 2004. "Informality Revisited," World Development, Elsevier, vol. 32(7), pages 1159-1178, July.
  8. de Mel, Suresh & McKenzie, David & Woodruff, Christopher, 2008. "Who Are the Microenterprise Owners? Evidence from Sri Lanka on Tokman v. de Soto," IZA Discussion Papers 3511, Institute for the Study of Labor (IZA).
  9. repec:idb:brikps:34839 is not listed on IDEAS
  10. Bosch, Mariano & Maloney, William, 2007. "Comparative analysis of labor market dynamics using markov processes : an application to informality," Policy Research Working Paper Series 4429, The World Bank.
  11. Rafael La Porta & Andrei Shleifer, 2008. "The Unofficial Economy and Economic Development," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 275-363.
  12. Rafael La Porta & Andrei Shleifer, 2011. "The Unofficial Economy in Africa," NBER Working Papers 16821, National Bureau of Economic Research, Inc.
  13. Aterido, Reyes & Hallward-Driemeier, Mary & Pages, Carmen, 2011. "Does expanding health insurance beyond formal-sector workers encourage informality ? measuring the impact of Mexico's Seguro Popular," Policy Research Working Paper Series 5785, The World Bank.
  14. McKenzie, David & Sakho, Yaye Seynabou, 2007. "Does it pay firms to register for taxes ? the impact of formality on firm profitability," Policy Research Working Paper Series 4449, The World Bank.
  15. Kaplan, David S. & Piedra, Eduardo & Seira, Enrique, 2011. "Entry regulation and business start-ups: Evidence from Mexico," Journal of Public Economics, Elsevier, vol. 95(11), pages 1501-1515.
  16. Mariano Bosch & William Maloney, 2006. "Gross worker flows in the presence of informal labor markets. The Mexican experience 1987-2002," LSE Research Online Documents on Economics 19798, London School of Economics and Political Science, LSE Library.
  17. McCulloch, Neil & Schulze, Günther G. & Voss, Janina, 2009. "What Determines Firms' Decisions to Formalize? Empirical Evidence from Rural Indonesia," Proceedings of the German Development Economics Conference, Frankfurt a.M. 2009 32, Verein für Socialpolitik, Research Committee Development Economics.
  18. Fajnzylber, Pablo & Maloney, William F. & Montes-Rojas, Gabriel V., 2011. "Does formality improve micro-firm performance? Evidence from the Brazilian SIMPLES program," Journal of Development Economics, Elsevier, vol. 94(2), pages 262-276, March.
  19. Josh Lerner & Antoinette Schoar, 2010. "International Differences in Entrepreneurship," NBER Books, National Bureau of Economic Research, Inc, number lern08-2, October.
  20. John Bennett, 2010. "Informal firms in developing countries: entrepreneurial stepping stone or consolation prize?," Small Business Economics, Springer, vol. 34(1), pages 53-63, January.
  21. Guillermo E. Perry & William F. Maloney & Omar S. Arias & Pablo Fajnzylber & Andrew D. Mason & Jaime Saavedra-Chanduvi, 2007. "Informality : Exit and Exclusion," World Bank Publications, The World Bank, number 6730, January.
  22. R. Hirschowitz, 1989. "The Other Path: The Invisible Revolution in the Third World," South African Journal of Economics, Economic Society of South Africa, vol. 57(4), pages 266-272, December.
  23. Maloney, William F, 1999. "Does Informality Imply Segmentation in Urban Labor Markets? Evidence from Sectoral Transitions in Mexico," World Bank Economic Review, World Bank Group, vol. 13(2), pages 275-302, May.
  24. Simeon Djankov & Yingyi Qian & Gerard Roland & Ekaterina Zhuravskaya, 2006. "Entrepreneurship in Brazil, China, and Russia," Working Papers w0066, Center for Economic and Financial Research (CEFIR).
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Citations

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Cited by:
  1. Sara G. Castellanos & F. Javier Morales & Mariana A. Toran, 2012. "Analisis del uso de servicios financieros por parte de las empresas en Mexico. Que nos dice el Censo Economico 2009," Working Papers 1215, BBVA Bank, Economic Research Department.
  2. Sara G. Castellanos & F. Javier Morales & Mariana A. Toran, 2012. "Analysis of the Use of Financial Services by Companies in Mexico. What does the 2009 Economic Census tell us," Working Papers 1216, BBVA Bank, Economic Research Department.

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