Nudging microentrepreneurs under fire: Experimental evidence from favelas in Rio de Janeiro

Do behavioral biases and the distortions generated by the presence of organized crime limit microentrepreneurs’ adoption of growth-oriented business practices? We explore this question in a field experiment with informal microentrepreneurs in which we provide informational visits and text messages about the advantages and convenience of a formalization program. All microentrepreneurs operated in Complexo Maré, a Favela in Rio de Janeiro, Brazil, where an important contextual factor was the presence of organized crime groups. After a recent state intervention, violence had increased in the intervened territories. Our average results suggest that while informative in-person visits do increase the knowledge about the formalization program and even the interest in formalizing, complementing the intervention with reminding messages is needed to increase business formalization. That is, treatment groups that received either information sessions or text messages show no effect, while those receiving both treatments show an increase in formalization by 8.5 percentage points. We also find, however, that these effects of the nudging intervention can be cancelled out by the distortions imposed by organized crime, in particular, by the mobility restrictions they often use to control their territories. We interpret these results as evidence in support of the importance of behavioral interventions such as reminder messages, to overcome limited attention and procrastination biases by microentrepreneurs, but also as an indication of the impacts that organized crime may have on adopting good business practices.