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Small firms’ formalization: the stick treatment

Author

Listed:
  • De Giorgi, Giacomo

    (Federal Reserve Bank of New York)

  • Ploenzke, Matthew

    (Federal Reserve Bank of New York)

  • Rahman, Aminur

    (World Bank Group)

Abstract

Firm informality is pervasive throughout the developing world, and Bangladesh is no exception. The informal status of many firms substantially reduces the tax basis and therefore affects the provision of public goods. The literature on encouraging formalization has focused predominantly on reducing the direct costs of formalization and has found negligible effects from such policies. In this paper, we focus on a stick intervention, which, to the best of our knowledge, is the first in a developing-country setting to deal with the most direct and dominant form of informality: the lack of registration with the tax authority and direct link to the country’s potential revenue base and thus public goods provision. We implement an experiment in which firms are visited by representatives who deliver an official letter from the Bangladesh National Tax Authority stating that the firm is not registered and threatening punishment if it fails to register. We find that the intervention increases the rate of registration among treated firms, while firms located in the same market but not treated do not seem to respond significantly. We also find that only larger-revenue firms at the baseline respond to the threat and register. Our findings have at least two important policy implications: 1) the enforcement angle, which could be an important tool to encourage formalization; and 2) targeting of government resources for formalization to the high-end informal firms. The effects are generally small in level, leaving open the question of why many firms still do not register.

Suggested Citation

  • De Giorgi, Giacomo & Ploenzke, Matthew & Rahman, Aminur, 2015. "Small firms’ formalization: the stick treatment," Staff Reports 728, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:728
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    References listed on IDEAS

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    1. Schneider, Friedrich, 2005. "Shadow economies around the world: what do we really know?," European Journal of Political Economy, Elsevier, vol. 21(3), pages 598-642, September.
    2. Bruhn, Miriam, 2013. "A tale of two species: Revisiting the effect of registration reform on informal business owners in Mexico," Journal of Development Economics, Elsevier, vol. 103(C), pages 275-283.
    3. Philipp Doerrenberg & Jan Schmitz, 2017. "Tax compliance and information provision. A field experiment with small firms," Journal of Behavioral Economics for Policy, Society for the Advancement of Behavioral Economics (SABE), vol. 1(1), pages 47-54, February.
    4. Gabriela Calderón & Jesse M.Cunha ; & Giacomo De Giorgi, 2013. "Business Literacy and Development: Evidence from a Randomized Controlled Trial in Rural Mexico," Working Papers 2013-24, Banco de México.
    5. 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.
    6. Friedrich Schneider, 2005. "Shadow Economies of 145 Countries all over the World: What Do We Really Know?," CREMA Working Paper Series 2005-13, Center for Research in Economics, Management and the Arts (CREMA).
    7. Suresh de Mel & David McKenzie & Christopher Woodruff, 2010. "Who are the Microenterprise Owners? Evidence from Sri Lanka on Tokman versus De Soto," NBER Chapters,in: International Differences in Entrepreneurship, pages 63-87 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Floridi, A. & Demena, B.A. & Wagner, N., 2019. "Shedding light on the shadows of informality : A meta-analysis of formalization interventions targeted at informal firms," ISS Working Papers - General Series 642, International Institute of Social Studies of Erasmus University Rotterdam (ISS), The Hague.
    2. 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).
    3. Giulia Mascagni, 2018. "From The Lab To The Field: A Review Of Tax Experiments," Journal of Economic Surveys, Wiley Blackwell, vol. 32(2), pages 273-301, April.
    4. Collen Lediga & Nadine Riedel & Kristina Strohmaier, 2018. "Combatting Tax Evasion: Evidence from Comparing Commercial and Business Tax Registry," CESifo Working Paper Series 7117, CESifo Group Munich.

    More about this item

    Keywords

    firms; informality; development;

    JEL classification:

    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General

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