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Does inducing informal firms to formalize make sense? Experimental evidence from Benin

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  • Benhassine, Najy
  • McKenzie, David
  • Pouliquen, Victor
  • Santini, Massimiliano

Abstract

Efforts to bring informal firms into the formal sector are often based on a view that this will bring benefits to the firms themselves, or at least benefit governments through increasing the tax base. A randomized experiment based around the introduction of the entreprenant legal status in Benin is used to test these assumptions, along with supplementary efforts to enhance the presumed benefits of formalizing to firms. Few firms register when just given information about the new regime, but our full package of supplementary efforts boosts formalization by 16.3 percentage points. However, this formalization does not bring firms higher sales or profits, and the cost of formalizing these firms exceeds the added taxation they will pay over the next decade. We show how better targeting of these policies towards firms that look more like formal firms to begin with can increase the formalization rate and improve cost-effectiveness.

Suggested Citation

  • Benhassine, Najy & McKenzie, David & Pouliquen, Victor & Santini, Massimiliano, 2018. "Does inducing informal firms to formalize make sense? Experimental evidence from Benin," Journal of Public Economics, Elsevier, vol. 157(C), pages 1-14.
  • Handle: RePEc:eee:pubeco:v:157:y:2018:i:c:p:1-14
    DOI: 10.1016/j.jpubeco.2017.11.004
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Diaz, Juan Jose & Chacaltana, Juan & Rigolini, Jamele & Ruiz, Claudia, 2018. "Pathways to Formalization: Going beyond the Formality Dichotomy," IZA Discussion Papers 11750, Institute of Labor Economics (IZA).
    2. Jessen, Jonas & Kluve, Jochen, 2021. "The effectiveness of interventions to reduce informality in low- and middle-income countries," World Development, Elsevier, vol. 138(C).
    3. Gareth Liu-Evans & Shalini Mitra, 2020. "Formal sector enforcement and welfare," Working Papers 202030, University of Liverpool, Department of Economics.
    4. Andy McKay & Jukka Pirttilä & Caroline Schimanski, 2019. "The tax elasticity of formal work in African countries," WIDER Working Paper Series wp-2019-69, World Institute for Development Economic Research (UNU-WIDER).
    5. Manabu Nose, 2018. "Road to Industrialized Africa: Role of Efficient Factor Market in Firm Growth," IMF Working Papers 2018/184, International Monetary Fund.
    6. Jade Siu, 2020. "Formalising informal cross-border trade: Evidence from One-Stop-Border-Posts in Uganda," Discussion Papers 20-08, Department of Economics, University of Birmingham.
    7. McKay Andy & Pirttilä Jukka & Schimanski Caroline, 2018. "The Elasticity of Formal Work in African Countries," Working Papers 1820, Tampere University, School of Management and Business, Economics.
    8. Sarah Xue Dong & Dewi Meisari & Banu Rinaldi, 2021. "Out of the shadow: Encouraging online registration of micro and small businesses through a randomized controlled trial," Departmental Working Papers 2021-05, The Australian National University, Arndt-Corden Department of Economics.
    9. Floridi, Andrea & Demena, Binyam Afewerk & Wagner, Natascha, 2020. "Shedding light on the shadows of informality: A meta-analysis of formalization interventions targeted at informal firms," Labour Economics, Elsevier, vol. 67(C).

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    More about this item

    Keywords

    Informality; Small enterprises; Regulatory simplification;
    All these keywords.

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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