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Does Formality Improve Micro-Firm Performance? Quasi-Experimental Evidence from the Brazilian SIMPLES Program

  • Fajnzylber, Pablo

    ()

    (World Bank)

  • Maloney, William F.

    ()

    (World Bank)

  • Montes-Rojas, Gabriel V.

    ()

    (City University London)

This paper employs regression discontinuity methods to identify the effect of formality on Brazilian micro-firm performance. The SIMPLES program introduced in November 1996 consolidated multiple taxes and social security contributions into a single payment and reduced taxes for eligible small firms. This provides a quasi-natural experiment that allows us to eliminate many of the endogeneity issues surrounding the impact of formality, measured across several dimensions, on firm performance. We find that SIMPLES had a significant effect on the proportion of firms that have a license to operate, are registered as a legal entity, pay taxes and make social security contributions. Moreover, newly created firms that opt for operating formally achieve higher levels of revenue and profits, employ more workers and are more capital intensive (only for those firms that have employees). The channel through which this occurs is not access to credit or contracts with larger firms. Rather, it appears that the lower cost of contracting labor leads to adopting production techniques that involve greater permanence and a larger paid labor force.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4531.

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Length: 37 pages
Date of creation: Oct 2009
Date of revision:
Handle: RePEc:iza:izadps:dp4531
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  1. Aureo de Paula & Jose A Sheinkman, 2007. "The Informal Sector," Levine's Bibliography 122247000000001663, UCLA Department of Economics.
  2. Almeida, Rita & Carneiro, Pedro, 2005. "Enforcement of labor regulation, informal labor, and firm performance," Policy Research Working Paper Series 3756, The World Bank.
  3. Wilbert van der Klaauw, 2002. "Estimating the Effect of Financial Aid Offers on College Enrollment: A Regression-Discontinuity Approach," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(4), pages 1249-1287, November.
  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. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers 0284, National Bureau of Economic Research, Inc.
  6. 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.
  7. 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.
  8. Levenson, Alec R. & Maloney, William F., 1998. "The informal sector, firm dynamics, and institutional participation," Policy Research Working Paper Series 1988, The World Bank.
  9. Imbens, Guido W & Angrist, Joshua D, 1994. "Identification and Estimation of Local Average Treatment Effects," Econometrica, Econometric Society, vol. 62(2), pages 467-75, March.
  10. David McKenzie & Christopher Woodruff, 2008. "Experimental Evidence on Returns to Capital and Access to Finance in Mexico," World Bank Economic Review, World Bank Group, vol. 22(3), pages 457-482, November.
  11. Pablo Fajnzylber & William Maloney & Gabriel Montes-Rojas, 2009. "Releasing Constraints to Growth or Pushing on a String? Policies and Performance of Mexican Micro-Firms," Journal of Development Studies, Taylor & Francis Journals, vol. 45(7), pages 1027-1047.
  12. James Heckman & Carmen Pages, 2003. "Law and Employment: Lessons from Latin America and the Caribbean," NBER Working Papers 10129, National Bureau of Economic Research, Inc.
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