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A helping hand or the long arm of the law ? experimental evidence on what governments can do to formalize firms

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  • de Andrade, Gustavo Henrique
  • Bruhn, Miriam
  • McKenzie, David

Abstract

Many governments have spent much of the past decade trying to extend a helping hand to informal businesses by making it easier and cheaper for them to formalize. Much less effort has been devoted to raising the costs of remaining informal, through increasing enforcement of existing regulations. This paper reports on a field experiment conducted in Belo Horizonte, Brazil, in order to test which government actions work in getting informal firms to register. Firms were randomized to a control group or one of four treatment groups: the first received information about how to formalize; the second received this information and free registration costs along with the use of an accountant for a year; the third group was assigned to receive an enforcement visit from a municipal inspector; while the fourth group was assigned to have a neighboring firm receive an enforcement visit to see if enforcement has spillovers. The analysis finds zero or negative impacts of information and free cost treatments, and a significant but small increase in formalization from inspections. Estimates of the impact of actually receiving an inspection give a 21 to 27 percentage point increase in the likelihood of formalizing. The results show most informal firms will not formalize unless forced to do so, suggesting formality offers little private benefit to them. But the tax revenue benefits to the government of bringing firms of this size into the formal system more than offset the costs of inspections.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6435.

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Date of creation: 01 May 2013
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Handle: RePEc:wbk:wbrwps:6435

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Keywords: Microfinance; E-Business; Small Scale Enterprise; Knowledge for Development; Information Security&Privacy;

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References

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  1. Alm, James & McClelland, Gary H. & Schulze, William D., 1992. "Why do people pay taxes?," Journal of Public Economics, Elsevier, vol. 48(1), pages 21-38, June.
  2. Lucas Ronconi, 2010. "Enforcement and Compliance with Labor Regulations," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 63(4), pages 719-736, July.
  3. de Mel, Suresh & McKenzie, David & Woodruff, Christopher, 2012. "The demand for, and consequences of, formalization among informal firms in Sri Lanka," Policy Research Working Paper Series 5991, The World Bank.
  4. McKenzie, David & Sakho, Yaye Seynabou, 2007. "Does It Pay Firms to Register for Taxes? The Impact of Formality on Firm Profitability," IZA Discussion Papers 3179, Institute for the Study of Labor (IZA).
  5. 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.
  6. 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.
  7. Marianne Bertrand & Francis Kramarz, 2001. "Does Entry Regulation Hinder Job Creation ? Evidence from the French Retail Industry," Working Papers 2001-12, Centre de Recherche en Economie et Statistique.
  8. Rafael La Porta & Andrei Shleifer, 2008. "The Unofficial Economy and Economic Development," NBER Working Papers 14520, National Bureau of Economic Research, Inc.
  9. Klapper, Leora & Laeven, Luc & Rajan, Raghuram, 2006. "Entry regulation as a barrier to entrepreneurship," Journal of Financial Economics, Elsevier, vol. 82(3), pages 591-629, December.
  10. John Gibson & David McKenzie, 2007. "Using the Global Positioning System (GPS) in Household Surveys For Better Economics and Better Policy," Working Papers in Economics 07/04, University of Waikato, Department of Economics.
  11. David Kaplan & Eduardo Piedra & Enrique Seira, 2006. "Are Burdensome Registration Procedures an Important Barrier on Firm Creation? Evidence from Mexico," Discussion Papers 06-013, Stanford Institute for Economic Policy Research.
  12. 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.
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Cited by:
  1. Benjamin, Nancy & Beegle, Kathleen & Recanatini, Francesca & Santini, Massimiliano, 2014. "Informal economy and the World Bank," Policy Research Working Paper Series 6888, The World Bank.

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