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The demand for, and consequences of, formalization among informal firms in Sri Lanka

  • Suresh De Mel
  • David McKenzie
  • Christopher Woodruff

We conduct a field experiment in Sri Lanka providing informal firms incentives to formalize. Information about the registration process and reimbursement of direct costs has no effect. Payments equivalent to one-half to one month (alternatively, 2 months) of the median firm's profits leads to registration of around one-fifth (alternatively, one-half) of firms. Land ownership issues are the most common reason for not registering. Follow-up surveys 15 to 31 months later show higher mean profits, but largely in a few firms which grew rapidly. We find little evidence for other changes in behavior, but formalized firms express more trust in the state.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18019.

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Date of creation: Apr 2012
Date of revision:
Publication status: published as Suresh de Mel & David McKenzie & Christopher Woodruff, 2013. "The Demand for, and Consequences of, Formalization among Informal Firms in Sri Lanka," American Economic Journal: Applied Economics, American Economic Association, vol. 5(2), pages 122-50, April.
Handle: RePEc:nbr:nberwo:18019
Note: PR
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  1. McKenzie, David & Sakho, Yaye Seynabou, 2007. "Does It Pay Firms to Register for Taxes? The Impact of Formality on Firm Profitability," IZA Discussion Papers 3179, Institute for the Study of Labor (IZA).
  2. Chang-Tai Hsieh & Peter J Klenow, 2008. "Misallocation and Manufacturing TFP in China and India," 2008 Meeting Papers 121, Society for Economic Dynamics.
  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. Bruhn, Miriam, 2008. "License to sell : the effect of business registration reform on entrepreneurial activity in Mexico," Policy Research Working Paper Series 4538, The World Bank.
  6. Suresh de Mel & David McKenzie & Christopher Woodruff, 2008. "Returns to Capital in Microenterprises: Evidence from a Field Experiment," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1329-1372, November.
  7. McKenzie, David, 2011. "Beyond baseline and follow-up : the case for more t in experiments," Policy Research Working Paper Series 5639, The World Bank.
  8. Kaplan, David S. & Piedra, Eduardo & Seira, Enrique, 2011. "Entry regulation and business start-ups: Evidence from Mexico," Journal of Public Economics, Elsevier, vol. 95(11), pages 1501-1515.
  9. Rafael La Porta & Andrei Shleifer, 2008. "The Unofficial Economy and Economic Development," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 275-363.
  10. de Mel, Suresh & McKenzie, David J. & Woodruff, Christopher, 2009. "Measuring microenterprise profits: Must we ask how the sausage is made?," Journal of Development Economics, Elsevier, vol. 88(1), pages 19-31, January.
  11. Klapper, Leora & Laeven, Luc & Rajan, Raghuram, 2006. "Entry regulation as a barrier to entrepreneurship," Journal of Financial Economics, Elsevier, vol. 82(3), pages 591-629, December.
  12. Bertrand, Marianne & Kramarz, Francis, 2002. "Does Entry Regulation Hinder Job Creation? Evidence from the French Retail Industry," IZA Discussion Papers 415, Institute for the Study of Labor (IZA).
  13. Rafael Di Tella & Sebastian Galiani & Ernesto Schargrodsky, 2007. "The Formation of Beliefs: Evidence from the Allocation of Land Titles to Squatters," The Quarterly Journal of Economics, MIT Press, vol. 122(1), pages 209-241, 02.
  14. Guillermo E. Perry & William F. Maloney & Omar S. Arias & Pablo Fajnzylber & Andrew D. Mason & Jaime Saavedra-Chanduvi, 2007. "Informality : Exit and Exclusion," World Bank Publications, The World Bank, number 6730, September.
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