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A Helping Hand or the Long Arm of the Law? Experimental Evidence on What Governments Can Do to Formalize Firms

Author

Listed:
  • Gustavo Henrique de Andrade
  • Miriam Bruhn
  • David McKenzie

Abstract

We conducted a field experiment in Belo Horizonte, Brazil to test which government actions work to encourage informal firms to register. We find zero or negative impacts of information and free cost treatments and a significant but small increase in formalization from inspections. The local average treatment effect estimates of the inspection impact are larger, providing a 21 to 27 percentage point increase in the likelihood of formalizing. The results show that most informal firms will not formalize unless forced to do so, suggesting that formality offers little private benefit to these firms.

Suggested Citation

  • Gustavo Henrique de Andrade & Miriam Bruhn & David McKenzie, 2016. "A Helping Hand or the Long Arm of the Law? Experimental Evidence on What Governments Can Do to Formalize Firms," The World Bank Economic Review, World Bank, vol. 30(1), pages 24-54.
    • Handle: RePEc:oup:wbecrv:v:30:y:2016:i:1:p:24-54.
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    File URL: http://hdl.handle.net/10.1093/wber/lhu008
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    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
    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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