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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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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," World Bank Economic Review, World Bank Group, 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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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Targeting which informal firms might formalize and bringing them into the tax system
      by David McKenzie in Development Impact on 2017-02-06 20:14:00

    Citations

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    Cited by:

    1. David McKenzie & Anna Luisa Paffhausen, 2019. "Small Firm Death in Developing Countries," The Review of Economics and Statistics, MIT Press, vol. 101(4), pages 645-657, October.
    2. Melanie Khamis, 2014. "Formalization of jobs and firms in emerging market economies through registration reform," IZA World of Labor, Institute of Labor Economics (IZA), pages 1-67, May.
    3. Caio Piza & Tulio Antonio Cravo & Linnet Taylor & Lauro Gonzalez & Isabel Musse & Isabela Furtado & Ana C. Sierra & Samer Abdelnour, 2016. "The Impact of Business Support Services for Small and Medium Enterprises on Firm Performance in Low‐ and Middle‐Income Countries: A Systematic Review," Campbell Systematic Reviews, John Wiley & Sons, vol. 12(1), pages 1-167.
    4. Alejandro Cid & José María Cabrera & Marianne Bernatzky & María Ramírez-Michelena & Magdalena Blanco, 2019. "Strategies to increase the take-up of social benefits. Evidence from a field experiment in a deeply vulnerable population," Documentos de Trabajo/Working Papers 1908, Facultad de Ciencias Empresariales y Economia. Universidad de Montevideo..
    5. 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.
    6. Kumar, Krishna B. & Mahmud, Minhaj & Nataraj, Shanthi & Cho, Yoon Y., 2019. "Employer and Employee Preferences for Worker Benefits: Evidence from a Matched Survey on the Bangladesh Informal Sector," IZA Discussion Papers 12064, Institute of Labor Economics (IZA).
    7. Gabriel Ulyssea, 2018. "Firms, Informality, and Development: Theory and Evidence from Brazil," American Economic Review, American Economic Association, vol. 108(8), pages 2015-2047, August.
    8. Francisco B. Galarza & Fernando Requejo, 2019. "Reducing Informality Using Two-Sided Incentives: Theory and Experiment," Working Papers 149, Peruvian Economic Association.
    9. Mohammed Mardan, 2019. "Tax Systems and Development," CESifo Working Paper Series 7940, CESifo.
    10. Amadou Boly, 2015. "On the effects of formalization on taxes and wages: Panel evidence from Vietnam," WIDER Working Paper Series 042, World Institute for Development Economic Research (UNU-WIDER).
    11. Grimm, Michael & Paffhausen, Anna Luisa, 2015. "Do interventions targeted at micro-entrepreneurs and small and medium-sized firms create jobs? A systematic review of the evidence for low and middle income countries," Labour Economics, Elsevier, vol. 32(C), pages 67-85.
    12. Campos,Francisco Moraes Leitao & Goldstein,Markus P. & Mckenzie,David J. & Campos,Francisco Moraes Leitao & Goldstein,Markus P. & Mckenzie,David J., 2015. "Short-term impacts of formalization assistance and a bank information session on business registration and access to finance in Malawi," Policy Research Working Paper Series 7183, The World Bank.
    13. Rocha, Rudi & Ulyssea, Gabriel & Rachter, Laísa, 2018. "Do lower taxes reduce informality? Evidence from Brazil," Journal of Development Economics, Elsevier, vol. 134(C), pages 28-49.
    14. Amadou Boly, 2015. "On the Benefits of Formalization: Panel Evidence from Vietnam," WIDER Working Paper Series wp-2015-038, World Institute for Development Economic Research (UNU-WIDER).
    15. Benhassine,Najy & Mckenzie,David J. & Pouliquen,Victor Maurice Joseph & Santini,Massimiliano, 2015. "Finding a path to formalization in Benin : early results after the introduction of the entreprenant legal status," Policy Research Working Paper Series 7510, The World Bank.
    16. Colin C. Williams & Kwame Adom & Ioana Alexandra Horodnic, 2020. "Determinants Of The Level Of Informalization Of Enterprises: Some Evidence From Accra, Ghana," Journal of Developmental Entrepreneurship (JDE), World Scientific Publishing Co. Pte. Ltd., vol. 25(01), pages 1-24, March.
    17. Amadou Boly, 2015. "On the benefits of formalization: Panel evidence from Vietnam," WIDER Working Paper Series 038, World Institute for Development Economic Research (UNU-WIDER).
    18. James Sumberg & Justin Flynn & Philip Mader & Grace Mwaura & Marjoke Oosterom & Robert Sam‐Kpakra & Ayodele Ibrahim Shittu, 2020. "Formal‐sector employment and Africa's youth employment crisis: Irrelevance or policy priority?," Development Policy Review, Overseas Development Institute, vol. 38(4), pages 428-440, July.
    19. 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.
    20. Beegle,Kathleen G. & Benjamin,Nancy Claire & Recanatini,Francesca & Santini,Massimiliano, 2014. "Informal economy and the World Bank," Policy Research Working Paper Series 6888, The World Bank.
    21. Nancy Benjamin & Ahmadou Aly Mbaye, 2014. "Informality, Growth, and Development in Africa," WIDER Working Paper Series wp-2014-052, World Institute for Development Economic Research (UNU-WIDER).
    22. Jorge Alvarez & Cian Ruane, 2019. "Informality and Aggregate Productivity: The Case of Mexico," IMF Working Papers 19/257, International Monetary Fund.
    23. Roxana Maurizio, 2015. "Transitions to Formality and Declining Inequality: Argentina and Brazil in the 2000s," Development and Change, International Institute of Social Studies, vol. 46(5), pages 1047-1079, September.
    24. Amadou Boly, 2015. "On the Effects of Formalization on Taxes and Wages: Panel Evidence from Vietnam," WIDER Working Paper Series wp-2015-042, World Institute for Development Economic Research (UNU-WIDER).

    More about this item

    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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