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On the effect of the costs of operating formally: New experimental evidence

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  • Galiani, Sebastian
  • Meléndez, Marcela
  • Ahumada, Camila Navajas

Abstract

This paper analyzes the impact of the elimination of the initial fixed costs of business registration on the decision of informal firms to operate formally in Bogotá, Colombia. The Chamber of Commerce of Bogotá (CCB) conducts workshops for prospective formal-sector entrants and arranges personalized meetings for them with CCB agents. The CCB's decision to significantly reduce the transaction costs of registration and the entry into force of Act No. 1429 of 2010, which eliminated the costs of the initial procedure for registering as a formal enterprise and provided tax exemptions during the first years after formalization, provided us with an ideal natural experiment for studying how the elimination of the initial fixed costs of formalization would influence firms’ decision to operate formally or not. We obtained two important results. First, while a workshop treatment had no effect on firms’ formalization decisions, meetings at the firm with CCB agents raised the likelihood that a business would begin to operate formally by 5.5 percentage points for all the firms that were invited, at random, to participate in this segment of the intervention and by 32 percentage points for the firms that accepted the invitation. Second, the effect on the treated firms did not persist over time. In fact, after a year of formal operation, the effect disappeared. These results indicate that substantial reductions in the fixed costs of operating formally are not an effective means of influencing formalization choices, since such reductions had no lasting effect on formalization decisions.

Suggested Citation

  • Galiani, Sebastian & Meléndez, Marcela & Ahumada, Camila Navajas, 2017. "On the effect of the costs of operating formally: New experimental evidence," Labour Economics, Elsevier, vol. 45(C), pages 143-157.
  • Handle: RePEc:eee:labeco:v:45:y:2017:i:c:p:143-157 DOI: 10.1016/j.labeco.2016.11.011
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    Cited by:

    1. Benhassine,Najy & Mckenzie,David J. & Pouliquen,Victor Maurice Joseph & Santini,Massimiliano, 2016. "Can enhancing the benefits of formalization induce informal firms to become formal ? experimental evidence from Benin," Policy Research Working Paper Series 7900, The World Bank.
    2. Benito Arruñada, 2017. "Property as sequential exchange: The forgotten limits of private contract," Economics Working Papers 1547, Department of Economics and Business, Universitat Pompeu Fabra.
    3. Rothenberg, Alexander D. & Gaduh, Arya & Burger, Nicholas E. & Chazali, Charina & Tjandraningsih, Indrasari & Radikun, Rini & Sutera, Cole & Weilant, Sarah, 2016. "Rethinking Indonesia’s Informal Sector," World Development, Elsevier, vol. 80(C), pages 96-113.
    4. Giuseppe Danese, 2017. "One man’s trash is another man’s treasure: A comparative analysis of property rights in solid waste," Working Papers de Economia (Economics Working Papers) 02, Católica Porto Business School, Universidade Católica Portuguesa.

    More about this item

    Keywords

    J46; J21; Informality; randomized control trial (RCT); registration costs and sustainability;

    JEL classification:

    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J46 - Labor and Demographic Economics - - Particular Labor Markets - - - Informal Labor Market

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