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The impact of formality on firm profitability in Bolivia: an heterogeneous assessment

  • Ugarte, Darwin

    ()

    (Economics School of Louvain)

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    Recent evidence suggests that formality improves micro-firms profits in Bolivia. This gain is only for firms with 2 to 5 workers, while smaller and larger firms would lose out by formalizing (McKenzie and Sakho, 2010). However, as much of the empirical literature on this topic, the estimations are based on strong assumptions about unobservables. If the returns to formality vary among firms and these variations influence selection into formality, traditional estimators are biased (Heckman and Vytlacil, 2007). In this paper we consider these elements to estimate the heterogeneous effects of formality on firm profits in Bolivia. We find remarkable heterogeneity in the returns to formality, from -3% to 6%. The group of firms with positive marginal effects from formality corresponds to those which are most likely to register. We also characterize the firms that likely benefit from having a formal status. These would correspond to large firms which work at big scales.

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    File URL: http://www.iisec.ucb.edu.bo/journal/articulos/1702.pdf
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    Article provided by Instituto de Investigaciones Socio-Económicas (IISEC), Universidad Católica Boliviana in its journal Revista Latinoamericana de Desarrollo Economico.

    Volume (Year): (2012)
    Issue (Month): 17 (Mayo)
    Pages: 53-74

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    Handle: RePEc:ris:revlde:1702
    Contact details of provider: Postal: Universidad católica Boliviana San Pablo, Instituto de Investigaciones Socio Económicas, Av. 14 de septiembre 4807. Obrajes, La Paz, Bolivia
    Phone: (591-2) 784159
    Fax: (591-2) 786707
    Web page: http://www.iisec.ucb.edu.bo
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    1. Kaplan, David S. & Piedra, Eduardo & Seira, Enrique, 2007. "Entry regulation and business start-ups : evidence from Mexico," Policy Research Working Paper Series 4322, The World Bank.
    2. McKenzie, David & Seynabou Sakho, Yaye, 2010. "Does it pay firms to register for taxes? The impact of formality on firm profitability," Journal of Development Economics, Elsevier, vol. 91(1), pages 15-24, January.
    3. 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.
    4. 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.
    5. Miriam Bruhn, 2011. "License to Sell: The Effect of Business Registration Reform on Entrepreneurial Activity in Mexico," The Review of Economics and Statistics, MIT Press, vol. 93(1), pages 382-386, February.
    6. Gaaitzen De Vries, 2010. "Small Retailers in Brazil: Are Formal Firms Really More Productive?," Journal of Development Studies, Taylor & Francis Journals, vol. 46(8), pages 1345-1366.
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