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Informality and profitability : evidence from a new firm survey in Ecuador

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  • Medvedev, Denis
  • Oviedo, Ana Maria

Abstract

This paper estimates the impact of informality on firm profits using a new firm-level survey designed specifically for this study. The survey was administered to about 1,200 firms with 50 employees or less in Ecuador's two largest cities, Quito and Guayaquil, plus two main centers of economic activity near the northern and southern borders. The paper's results confirm that the extent of firms'compliance with a set of regulatory requirements is linked to the perceived costs and benefits of informality, such as the probability of detection by the authorities and the likelihood of being fined. Nonetheless, taking into account the non-random placement of firms along the formality-informality spectrum and controlling for a large set of firm, owner, and location characteristics, the paper finds that more formal firms tend to be more profitable and have higher output per worker. This impact operates, inter alia, through more formal firms'ability to obtain improved access to credit and achieve higher sales by issuing receipts to clients.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6431.

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Date of creation: 01 May 2013
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Handle: RePEc:wbk:wbrwps:6431

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Related research

Keywords: Access to Finance; Microfinance; E-Business; Banks&Banking Reform; Debt Markets;

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References

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  1. Stephane Straub, 2004. "Informal Sector: The Credit Market Channel," ESE Discussion Papers, Edinburgh School of Economics, University of Edinburgh 101, Edinburgh School of Economics, University of Edinburgh.
  2. de Mel, Suresh & McKenzie, David J. & Woodruff, Christopher, 2009. "Measuring microenterprise profits: Must we ask how the sausage is made?," Journal of Development Economics, Elsevier, Elsevier, vol. 88(1), pages 19-31, January.
  3. Katayama, Hajime & Lu, Shihua & Tybout, James R., 2009. "Firm-level productivity studies: Illusions and a solution," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 27(3), pages 403-413, May.
  4. Fajnzylber, Pablo & Maloney, William F. & Montes-Rojas, Gabriel V., 2009. "Does Formality Improve Micro-Firm Performance? Quasi-Experimental Evidence from the Brazilian SIMPLES Program," IZA Discussion Papers 4531, Institute for the Study of Labor (IZA).
  5. Paloma López-García & Sergio Puente, 2006. "Business demography in Spain: determinants of firm survival," Banco de Espa�a Working Papers 0608, Banco de Espa�a.
  6. Pablo Fajnzylber & William Maloney & Gabriel Montes-Rojas, 2009. "Releasing Constraints to Growth or Pushing on a String? Policies and Performance of Mexican Micro-Firms," Journal of Development Studies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 45(7), pages 1027-1047.
  7. World Bank, 2009. "Increasing Formality and Productivity of Bolivian Firms," World Bank Publications, The World Bank, number 2675, August.
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