A Helping Hand or the Long Arm of the Law? Experimental Evidence on What Governments Can Do to Formalize Firms

Gustavo Henrique de Andrade, Miriam Bruhn and David McKenzie
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Gustavo Henrique de Andrade: Governo do Estado de Minas Gerais

No 7402, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Many governments have spent much of the past decade trying to extend a helping hand to informal businesses by making it easier and cheaper for them to formalize. Much less effort has been devoted to raising the costs of remaining informal, through increasing enforcement of existing regulations. We conducted a field experiment in Belo Horizonte, Brazil, in order to test which government actions work in getting informal firms to register. Firms were randomized to a control group or one of four treatment groups: the first received information about how to formalize; the second received this information and free registration costs along with the use of an accountant for a year; the third group was assigned to receive an enforcement visit from a municipal inspector; while the fourth group was assigned to have a neighboring firm receive an enforcement visit to see if enforcement has spillovers. We find zero or negative impacts of information and free cost treatments, and a significant but small increase in formalization from inspections. Our LATE estimates of the impact of actually receiving an inspection are much bigger, giving a 21 to 27 percentage point increase in the likelihood of formalizing. The results show most informal firms won't formalize unless forced to do so, suggesting formality offers little private benefit to them, but the tax revenue benefits to the governments of bringing firms of this size into the formal system more than offset the costs of inspections.

Keywords: enforcement; small enterprises; informality (search for similar items in EconPapers)
JEL-codes: C93 D21 L26 O12 O17 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2013-05
New Economics Papers: this item is included in nep-exp and nep-iue
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (48)

Published - published in: World Bank Economic Review , 2016, 30 (1), 24-54

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Related works:
Journal Article: A Helping Hand or the Long Arm of the Law? Experimental Evidence on What Governments Can Do to Formalize Firms (2016)
Working Paper: A helping hand or the long arm of the law ? experimental evidence on what governments can do to formalize firms (2013)
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