The Demand for, and Consequences of, Formalization among Informal Firms in Sri Lanka
The majority of firms in most developing countries are informal. The authors of this paper conducted a field experiment in Sri Lanka that provided incentives for informal firms to formalize. Offering only information about the registration process and reimbursement for direct registration costs had no impact on formalization. Adding payments equivalent to one-half to one month's profits for the median firm led to registration of around one-fifth of firms. A larger payment equivalent to two months' median profits induced half the firms to register. The main reasons for not formalizing when offered incentives included issues related to ownership of land and concerns about facing labor taxes in the future. The degree of bureaucracy in the registration process also seems to matter for those with the incentive to register, with response to the incentives higher in Colombo, where the registration process was easier, than in Kandy. Three follow-up surveys, at 15 to 31 months after the intervention, measure the impact of formalizing on these firms. Although mean profits increased, this appears largely due to the experiences of a few firms that grew rapidly, with most firms experiencing no increase in income as a result of formalizing. The authors also find little evidence for most of the channels through which formalization is hypothesized to benefit firms, although formalized firms do advertise more and are more likely to use receipt books. In qualitative interviews owners of formalized firms also feel their businesses have more legitimacy. Finally, formalizing is found to result in a large increase in trust in the state. Their focus is largely on the private costs and benefits of existing firms formalizing. Within their sample they cannot measure broader impacts of formalization on other firms (who may prosper from not having to compete against informal firms not paying taxes), nor impacts of easier formalization on entry of new firms. Nevertheless, our results suggest that although most informal firms do not want to formalize, given the current private costs and benefits of formalizing, policy efforts that lead to relatively modest increases in the net benefits of formalizing would induce a sizeable share of informal firms to formalize.
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ACCESS TO BANKS ACCESS TO CREDIT ACCOUNTING ADVERTISING AGRICULTURE AUTOMOBILES BANK ACCOUNT BANK ACCOUNTS BANK FINANCING BANK LOAN BANK LOANS BANK POLICY BRIBE BRIBES BUDGET CONSTRAINTS BUSINESS ENABLING BUSINESS ENABLING ENVIRONMENT BUSINESS ENVIRONMENT BUSINESS FACILITATION BUSINESS LOAN BUSINESS LOANS BUSINESS OPERATION BUSINESS OWNER BUSINESS OWNERS BUSINESS REGISTRATION CAPITAL STOCK CERTIFICATE CERTIFICATES CHAMBER OF COMMERCE COMMERCIAL BANKS CORPORATION CREDIBILITY CREDIT CONSTRAINTS DEMAND CURVE DEVELOPING COUNTRIES DEVELOPMENT ECONOMICS DEVELOPMENT POLICY DOMAIN EARNINGS ECONOMIC ACTIVITY ECONOMIC DEVELOPMENT ECONOMIC GROWTH ECONOMICS ELECTRICITY EMPLOYEE EMPLOYER EMPLOYER CONTRIBUTION EMPLOYERS EMPLOYMENT EMPLOYMENT GROWTH ENABLING ENVIRONMENT ENTREPRENEURIAL ACTIVITY ENTREPRENEURS ENTREPRENEURSHIP EQUALITY EXCHANGE RATES EXCLUSION EXPANSIONS FINANCIAL SECTOR FIRM PERFORMANCE FIRM SIZE FIRM SIZES FIRMS FIXED COST FUTURE RESEARCH GOVERNMENT CONTRACT GOVERNMENT CONTRACTS GOVERNMENT ENTITIES HOUSEHOLDS HUSBAND IMAGE INCOME INCOME TAX INCOME TAXES INSPECTION INSTITUTION INSTRUMENT INTERNATIONAL BANK INTERNATIONAL FINANCE INVESTMENT DECISION JOB CREATION LAND ISSUES LAND OWNERSHIP LAND TITLES LAND TITLING LEGAL BARRIERS LEVY LIABILITY LICENSE LICENSE FEE LICENSE FEES LIQUIDITY LIQUIDITY CONSTRAINTS LOAN LOCAL GOVERNMENT MANUFACTURER MANUFACTURING MICRO ENTERPRISE MICROENTERPRISES NEW BUSINESS OPEN ACCESS PERSONAL LOAN PERSONAL LOANS POLICY RESPONSE POSITIVE COEFFICIENTS POSITIVE EFFECTS PRIVATE SECTOR PRIVATE SECTOR DEVELOPMENT PRODUCTION COSTS PRODUCTIVITY PROFITABILITY PROPERTY OWNER RECEIPT RECEIPTS REGISTRATION FEE REGISTRATION OF ENTERPRISES REGISTRATION PROCESS REGULATORY REFORMS RESULT RESULTS RETURN RETURNS SEES SHOP SHOP OWNER SMALL BUSINESSES SMALL ENTERPRISES SMALL FIRM SMALL FIRMS SME SOCIAL SECURITY START-UPS STORE TAX COLLECTION TAX COST TAX RATE TAXATION TECHNICAL SKILLS TIME FRAME TRANSACTION TRUST FUND URBAN AREA URBAN AREAS USES VENDOR WEALTH WEB Microdata Set ACCESS TO BANKS ACCESS TO CREDIT ACCOUNTING ADVERTISING AGRICULTURE AUTOMOBILES BANK ACCOUNT BANK ACCOUNTS BANK FINANCING BANK LOAN BANK LOANS BANK POLICY BRIBE BRIBES BUDGET CONSTRAINTS BUSINESS ENABLING BUSINESS ENABLING ENVIRONMENT BUSINESS ENVIRONMENT BUSINESS FACILITATION BUSINESS LOAN BUSINESS LOANS BUSINESS OPERATION BUSINESS OWNER BUSINESS OWNERS BUSINESS REGISTRATION CAPITAL STOCK CERTIFICATE CERTIFICATES CHAMBER OF COMMERCE COMMERCIAL BANKS CORPORATION CREDIBILITY CREDIT CONSTRAINTS DEMAND CURVE DEVELOPING COUNTRIES DEVELOPMENT ECONOMICS DEVELOPMENT POLICY DOMAIN EARNINGS ECONOMIC ACTIVITY ECONOMIC DEVELOPMENT ECONOMIC GROWTH ECONOMICS ELECTRICITY EMPLOYEE EMPLOYER EMPLOYER CONTRIBUTION EMPLOYERS EMPLOYMENT EMPLOYMENT GROWTH ENABLING ENVIRONMENT ENTREPRENEURIAL ACTIVITY ENTREPRENEURS ENTREPRENEURSHIP EQUALITY EXCHANGE RATES EXCLUSION EXPANSIONS FINANCIAL SECTOR FIRM PERFORMANCE FIRM SIZE FIRM SIZES FIRMS FIXED COST FUTURE RESEARCH GOVERNMENT CONTRACT GOVERNMENT CONTRACTS GOVERNMENT ENTITIES HOUSEHOLDS HUSBAND IMAGE INCOME INCOME TAX INCOME TAXES INSPECTION INSTITUTION INSTRUMENT INTERNATIONAL BANK INTERNATIONAL FINANCE INVESTMENT DECISION JOB CREATION LAND ISSUES LAND OWNERSHIP LAND TITLES LAND TITLING LEGAL BARRIERS LEVY LIABILITY LICENSE LICENSE FEE LICENSE FEES LIQUIDITY LIQUIDITY CONSTRAINTS LOAN LOCAL GOVERNMENT MANUFACTURER MANUFACTURING MICRO ENTERPRISE MICROENTERPRISES NEW BUSINESS OPEN ACCESS PERSONAL LOAN PERSONAL LOANS POLICY RESPONSE POSITIVE COEFFICIENTS POSITIVE EFFECTS PRIVATE SECTOR PRIVATE SECTOR DEVELOPMENT PRODUCTION COSTS PRODUCTIVITY PROFITABILITY PROPERTY OWNER RECEIPT RECEIPTS REGISTRATION FEE REGISTRATION OF ENTERPRISES REGISTRATION PROCESS REGULATORY REFORMS RESULT RESULTS RETURN RETURNS SEES SHOP SHOP OWNER SMALL BUSINESSES SMALL ENTERPRISES SMALL FIRM SMALL FIRMS SME SOCIAL SECURITY START-UPS STORE TAX COLLECTION TAX COST TAX RATE TAXATION TECHNICAL SKILLS TIME FRAME TRANSACTION TRUST FUND URBAN AREA URBAN AREAS USES VENDOR WEALTH WEB Microdata Set |
spellingShingle |
ACCESS TO BANKS ACCESS TO CREDIT ACCOUNTING ADVERTISING AGRICULTURE AUTOMOBILES BANK ACCOUNT BANK ACCOUNTS BANK FINANCING BANK LOAN BANK LOANS BANK POLICY BRIBE BRIBES BUDGET CONSTRAINTS BUSINESS ENABLING BUSINESS ENABLING ENVIRONMENT BUSINESS ENVIRONMENT BUSINESS FACILITATION BUSINESS LOAN BUSINESS LOANS BUSINESS OPERATION BUSINESS OWNER BUSINESS OWNERS BUSINESS REGISTRATION CAPITAL STOCK CERTIFICATE CERTIFICATES CHAMBER OF COMMERCE COMMERCIAL BANKS CORPORATION CREDIBILITY CREDIT CONSTRAINTS DEMAND CURVE DEVELOPING COUNTRIES DEVELOPMENT ECONOMICS DEVELOPMENT POLICY DOMAIN EARNINGS ECONOMIC ACTIVITY ECONOMIC DEVELOPMENT ECONOMIC GROWTH ECONOMICS ELECTRICITY EMPLOYEE EMPLOYER EMPLOYER CONTRIBUTION EMPLOYERS EMPLOYMENT EMPLOYMENT GROWTH ENABLING ENVIRONMENT ENTREPRENEURIAL ACTIVITY ENTREPRENEURS ENTREPRENEURSHIP EQUALITY EXCHANGE RATES EXCLUSION EXPANSIONS FINANCIAL SECTOR FIRM PERFORMANCE FIRM SIZE FIRM SIZES FIRMS FIXED COST FUTURE RESEARCH GOVERNMENT CONTRACT GOVERNMENT CONTRACTS GOVERNMENT ENTITIES HOUSEHOLDS HUSBAND IMAGE INCOME INCOME TAX INCOME TAXES INSPECTION INSTITUTION INSTRUMENT INTERNATIONAL BANK INTERNATIONAL FINANCE INVESTMENT DECISION JOB CREATION LAND ISSUES LAND OWNERSHIP LAND TITLES LAND TITLING LEGAL BARRIERS LEVY LIABILITY LICENSE LICENSE FEE LICENSE FEES LIQUIDITY LIQUIDITY CONSTRAINTS LOAN LOCAL GOVERNMENT MANUFACTURER MANUFACTURING MICRO ENTERPRISE MICROENTERPRISES NEW BUSINESS OPEN ACCESS PERSONAL LOAN PERSONAL LOANS POLICY RESPONSE POSITIVE COEFFICIENTS POSITIVE EFFECTS PRIVATE SECTOR PRIVATE SECTOR DEVELOPMENT PRODUCTION COSTS PRODUCTIVITY PROFITABILITY PROPERTY OWNER RECEIPT RECEIPTS REGISTRATION FEE REGISTRATION OF ENTERPRISES REGISTRATION PROCESS REGULATORY REFORMS RESULT RESULTS RETURN RETURNS SEES SHOP SHOP OWNER SMALL BUSINESSES SMALL ENTERPRISES SMALL FIRM SMALL FIRMS SME SOCIAL SECURITY START-UPS STORE TAX COLLECTION TAX COST TAX RATE TAXATION TECHNICAL SKILLS TIME FRAME TRANSACTION TRUST FUND URBAN AREA URBAN AREAS USES VENDOR WEALTH WEB Microdata Set ACCESS TO BANKS ACCESS TO CREDIT ACCOUNTING ADVERTISING AGRICULTURE AUTOMOBILES BANK ACCOUNT BANK ACCOUNTS BANK FINANCING BANK LOAN BANK LOANS BANK POLICY BRIBE BRIBES BUDGET CONSTRAINTS BUSINESS ENABLING BUSINESS ENABLING ENVIRONMENT BUSINESS ENVIRONMENT BUSINESS FACILITATION BUSINESS LOAN BUSINESS LOANS BUSINESS OPERATION BUSINESS OWNER BUSINESS OWNERS BUSINESS REGISTRATION CAPITAL STOCK CERTIFICATE CERTIFICATES CHAMBER OF COMMERCE COMMERCIAL BANKS CORPORATION CREDIBILITY CREDIT CONSTRAINTS DEMAND CURVE DEVELOPING COUNTRIES DEVELOPMENT ECONOMICS DEVELOPMENT POLICY DOMAIN EARNINGS ECONOMIC ACTIVITY ECONOMIC DEVELOPMENT ECONOMIC GROWTH ECONOMICS ELECTRICITY EMPLOYEE EMPLOYER EMPLOYER CONTRIBUTION EMPLOYERS EMPLOYMENT EMPLOYMENT GROWTH ENABLING ENVIRONMENT ENTREPRENEURIAL ACTIVITY ENTREPRENEURS ENTREPRENEURSHIP EQUALITY EXCHANGE RATES EXCLUSION EXPANSIONS FINANCIAL SECTOR FIRM PERFORMANCE FIRM SIZE FIRM SIZES FIRMS FIXED COST FUTURE RESEARCH GOVERNMENT CONTRACT GOVERNMENT CONTRACTS GOVERNMENT ENTITIES HOUSEHOLDS HUSBAND IMAGE INCOME INCOME TAX INCOME TAXES INSPECTION INSTITUTION INSTRUMENT INTERNATIONAL BANK INTERNATIONAL FINANCE INVESTMENT DECISION JOB CREATION LAND ISSUES LAND OWNERSHIP LAND TITLES LAND TITLING LEGAL BARRIERS LEVY LIABILITY LICENSE LICENSE FEE LICENSE FEES LIQUIDITY LIQUIDITY CONSTRAINTS LOAN LOCAL GOVERNMENT MANUFACTURER MANUFACTURING MICRO ENTERPRISE MICROENTERPRISES NEW BUSINESS OPEN ACCESS PERSONAL LOAN PERSONAL LOANS POLICY RESPONSE POSITIVE COEFFICIENTS POSITIVE EFFECTS PRIVATE SECTOR PRIVATE SECTOR DEVELOPMENT PRODUCTION COSTS PRODUCTIVITY PROFITABILITY PROPERTY OWNER RECEIPT RECEIPTS REGISTRATION FEE REGISTRATION OF ENTERPRISES REGISTRATION PROCESS REGULATORY REFORMS RESULT RESULTS RETURN RETURNS SEES SHOP SHOP OWNER SMALL BUSINESSES SMALL ENTERPRISES SMALL FIRM SMALL FIRMS SME SOCIAL SECURITY START-UPS STORE TAX COLLECTION TAX COST TAX RATE TAXATION TECHNICAL SKILLS TIME FRAME TRANSACTION TRUST FUND URBAN AREA URBAN AREAS USES VENDOR WEALTH WEB Microdata Set de Mel, Suresh McKenzie, David Woodruff, Christopher The Demand for, and Consequences of, Formalization among Informal Firms in Sri Lanka |
description |
The majority of firms in most developing
countries are informal. The authors of this paper conducted
a field experiment in Sri Lanka that provided incentives for
informal firms to formalize. Offering only information about
the registration process and reimbursement for direct
registration costs had no impact on formalization. Adding
payments equivalent to one-half to one month's profits
for the median firm led to registration of around one-fifth
of firms. A larger payment equivalent to two months'
median profits induced half the firms to register. The main
reasons for not formalizing when offered incentives included
issues related to ownership of land and concerns about
facing labor taxes in the future. The degree of bureaucracy
in the registration process also seems to matter for those
with the incentive to register, with response to the
incentives higher in Colombo, where the registration process
was easier, than in Kandy. Three follow-up surveys, at 15 to
31 months after the intervention, measure the impact of
formalizing on these firms. Although mean profits increased,
this appears largely due to the experiences of a few firms
that grew rapidly, with most firms experiencing no increase
in income as a result of formalizing. The authors also find
little evidence for most of the channels through which
formalization is hypothesized to benefit firms, although
formalized firms do advertise more and are more likely to
use receipt books. In qualitative interviews owners of
formalized firms also feel their businesses have more
legitimacy. Finally, formalizing is found to result in a
large increase in trust in the state. Their focus is largely
on the private costs and benefits of existing firms
formalizing. Within their sample they cannot measure broader
impacts of formalization on other firms (who may prosper
from not having to compete against informal firms not paying
taxes), nor impacts of easier formalization on entry of new
firms. Nevertheless, our results suggest that although most
informal firms do not want to formalize, given the current
private costs and benefits of formalizing, policy efforts
that lead to relatively modest increases in the net benefits
of formalizing would induce a sizeable share of informal
firms to formalize. |
format |
Publications & Research :: Policy Research Working Paper |
topic_facet |
ACCESS TO BANKS ACCESS TO CREDIT ACCOUNTING ADVERTISING AGRICULTURE AUTOMOBILES BANK ACCOUNT BANK ACCOUNTS BANK FINANCING BANK LOAN BANK LOANS BANK POLICY BRIBE BRIBES BUDGET CONSTRAINTS BUSINESS ENABLING BUSINESS ENABLING ENVIRONMENT BUSINESS ENVIRONMENT BUSINESS FACILITATION BUSINESS LOAN BUSINESS LOANS BUSINESS OPERATION BUSINESS OWNER BUSINESS OWNERS BUSINESS REGISTRATION CAPITAL STOCK CERTIFICATE CERTIFICATES CHAMBER OF COMMERCE COMMERCIAL BANKS CORPORATION CREDIBILITY CREDIT CONSTRAINTS DEMAND CURVE DEVELOPING COUNTRIES DEVELOPMENT ECONOMICS DEVELOPMENT POLICY DOMAIN EARNINGS ECONOMIC ACTIVITY ECONOMIC DEVELOPMENT ECONOMIC GROWTH ECONOMICS ELECTRICITY EMPLOYEE EMPLOYER EMPLOYER CONTRIBUTION EMPLOYERS EMPLOYMENT EMPLOYMENT GROWTH ENABLING ENVIRONMENT ENTREPRENEURIAL ACTIVITY ENTREPRENEURS ENTREPRENEURSHIP EQUALITY EXCHANGE RATES EXCLUSION EXPANSIONS FINANCIAL SECTOR FIRM PERFORMANCE FIRM SIZE FIRM SIZES FIRMS FIXED COST FUTURE RESEARCH GOVERNMENT CONTRACT GOVERNMENT CONTRACTS GOVERNMENT ENTITIES HOUSEHOLDS HUSBAND IMAGE INCOME INCOME TAX INCOME TAXES INSPECTION INSTITUTION INSTRUMENT INTERNATIONAL BANK INTERNATIONAL FINANCE INVESTMENT DECISION JOB CREATION LAND ISSUES LAND OWNERSHIP LAND TITLES LAND TITLING LEGAL BARRIERS LEVY LIABILITY LICENSE LICENSE FEE LICENSE FEES LIQUIDITY LIQUIDITY CONSTRAINTS LOAN LOCAL GOVERNMENT MANUFACTURER MANUFACTURING MICRO ENTERPRISE MICROENTERPRISES NEW BUSINESS OPEN ACCESS PERSONAL LOAN PERSONAL LOANS POLICY RESPONSE POSITIVE COEFFICIENTS POSITIVE EFFECTS PRIVATE SECTOR PRIVATE SECTOR DEVELOPMENT PRODUCTION COSTS PRODUCTIVITY PROFITABILITY PROPERTY OWNER RECEIPT RECEIPTS REGISTRATION FEE REGISTRATION OF ENTERPRISES REGISTRATION PROCESS REGULATORY REFORMS RESULT RESULTS RETURN RETURNS SEES SHOP SHOP OWNER SMALL BUSINESSES SMALL ENTERPRISES SMALL FIRM SMALL FIRMS SME SOCIAL SECURITY START-UPS STORE TAX COLLECTION TAX COST TAX RATE TAXATION TECHNICAL SKILLS TIME FRAME TRANSACTION TRUST FUND URBAN AREA URBAN AREAS USES VENDOR WEALTH WEB Microdata Set |
author |
de Mel, Suresh McKenzie, David Woodruff, Christopher |
author_facet |
de Mel, Suresh McKenzie, David Woodruff, Christopher |
author_sort |
de Mel, Suresh |
title |
The Demand for, and Consequences of, Formalization among Informal Firms in Sri Lanka |
title_short |
The Demand for, and Consequences of, Formalization among Informal Firms in Sri Lanka |
title_full |
The Demand for, and Consequences of, Formalization among Informal Firms in Sri Lanka |
title_fullStr |
The Demand for, and Consequences of, Formalization among Informal Firms in Sri Lanka |
title_full_unstemmed |
The Demand for, and Consequences of, Formalization among Informal Firms in Sri Lanka |
title_sort |
demand for, and consequences of, formalization among informal firms in sri lanka |
publishDate |
2012-03-01 |
url |
http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20120312094118 http://hdl.handle.net/10986/3279 |
work_keys_str_mv |
AT demelsuresh thedemandforandconsequencesofformalizationamonginformalfirmsinsrilanka AT mckenziedavid thedemandforandconsequencesofformalizationamonginformalfirmsinsrilanka AT woodruffchristopher thedemandforandconsequencesofformalizationamonginformalfirmsinsrilanka AT demelsuresh demandforandconsequencesofformalizationamonginformalfirmsinsrilanka AT mckenziedavid demandforandconsequencesofformalizationamonginformalfirmsinsrilanka AT woodruffchristopher demandforandconsequencesofformalizationamonginformalfirmsinsrilanka |
_version_ |
1756571321508036608 |
spelling |
dig-okr-1098632792021-04-23T14:02:08Z The Demand for, and Consequences of, Formalization among Informal Firms in Sri Lanka de Mel, Suresh McKenzie, David Woodruff, Christopher ACCESS TO BANKS ACCESS TO CREDIT ACCOUNTING ADVERTISING AGRICULTURE AUTOMOBILES BANK ACCOUNT BANK ACCOUNTS BANK FINANCING BANK LOAN BANK LOANS BANK POLICY BRIBE BRIBES BUDGET CONSTRAINTS BUSINESS ENABLING BUSINESS ENABLING ENVIRONMENT BUSINESS ENVIRONMENT BUSINESS FACILITATION BUSINESS LOAN BUSINESS LOANS BUSINESS OPERATION BUSINESS OWNER BUSINESS OWNERS BUSINESS REGISTRATION CAPITAL STOCK CERTIFICATE CERTIFICATES CHAMBER OF COMMERCE COMMERCIAL BANKS CORPORATION CREDIBILITY CREDIT CONSTRAINTS DEMAND CURVE DEVELOPING COUNTRIES DEVELOPMENT ECONOMICS DEVELOPMENT POLICY DOMAIN EARNINGS ECONOMIC ACTIVITY ECONOMIC DEVELOPMENT ECONOMIC GROWTH ECONOMICS ELECTRICITY EMPLOYEE EMPLOYER EMPLOYER CONTRIBUTION EMPLOYERS EMPLOYMENT EMPLOYMENT GROWTH ENABLING ENVIRONMENT ENTREPRENEURIAL ACTIVITY ENTREPRENEURS ENTREPRENEURSHIP EQUALITY EXCHANGE RATES EXCLUSION EXPANSIONS FINANCIAL SECTOR FIRM PERFORMANCE FIRM SIZE FIRM SIZES FIRMS FIXED COST FUTURE RESEARCH GOVERNMENT CONTRACT GOVERNMENT CONTRACTS GOVERNMENT ENTITIES HOUSEHOLDS HUSBAND IMAGE INCOME INCOME TAX INCOME TAXES INSPECTION INSTITUTION INSTRUMENT INTERNATIONAL BANK INTERNATIONAL FINANCE INVESTMENT DECISION JOB CREATION LAND ISSUES LAND OWNERSHIP LAND TITLES LAND TITLING LEGAL BARRIERS LEVY LIABILITY LICENSE LICENSE FEE LICENSE FEES LIQUIDITY LIQUIDITY CONSTRAINTS LOAN LOCAL GOVERNMENT MANUFACTURER MANUFACTURING MICRO ENTERPRISE MICROENTERPRISES NEW BUSINESS OPEN ACCESS PERSONAL LOAN PERSONAL LOANS POLICY RESPONSE POSITIVE COEFFICIENTS POSITIVE EFFECTS PRIVATE SECTOR PRIVATE SECTOR DEVELOPMENT PRODUCTION COSTS PRODUCTIVITY PROFITABILITY PROPERTY OWNER RECEIPT RECEIPTS REGISTRATION FEE REGISTRATION OF ENTERPRISES REGISTRATION PROCESS REGULATORY REFORMS RESULT RESULTS RETURN RETURNS SEES SHOP SHOP OWNER SMALL BUSINESSES SMALL ENTERPRISES SMALL FIRM SMALL FIRMS SME SOCIAL SECURITY START-UPS STORE TAX COLLECTION TAX COST TAX RATE TAXATION TECHNICAL SKILLS TIME FRAME TRANSACTION TRUST FUND URBAN AREA URBAN AREAS USES VENDOR WEALTH WEB Microdata Set The majority of firms in most developing countries are informal. The authors of this paper conducted a field experiment in Sri Lanka that provided incentives for informal firms to formalize. Offering only information about the registration process and reimbursement for direct registration costs had no impact on formalization. Adding payments equivalent to one-half to one month's profits for the median firm led to registration of around one-fifth of firms. A larger payment equivalent to two months' median profits induced half the firms to register. The main reasons for not formalizing when offered incentives included issues related to ownership of land and concerns about facing labor taxes in the future. The degree of bureaucracy in the registration process also seems to matter for those with the incentive to register, with response to the incentives higher in Colombo, where the registration process was easier, than in Kandy. Three follow-up surveys, at 15 to 31 months after the intervention, measure the impact of formalizing on these firms. Although mean profits increased, this appears largely due to the experiences of a few firms that grew rapidly, with most firms experiencing no increase in income as a result of formalizing. The authors also find little evidence for most of the channels through which formalization is hypothesized to benefit firms, although formalized firms do advertise more and are more likely to use receipt books. In qualitative interviews owners of formalized firms also feel their businesses have more legitimacy. Finally, formalizing is found to result in a large increase in trust in the state. Their focus is largely on the private costs and benefits of existing firms formalizing. Within their sample they cannot measure broader impacts of formalization on other firms (who may prosper from not having to compete against informal firms not paying taxes), nor impacts of easier formalization on entry of new firms. Nevertheless, our results suggest that although most informal firms do not want to formalize, given the current private costs and benefits of formalizing, policy efforts that lead to relatively modest increases in the net benefits of formalizing would induce a sizeable share of informal firms to formalize. 2012-03-19T17:29:38Z 2012-03-19T17:29:38Z 2012-03-01 http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20120312094118 http://hdl.handle.net/10986/3279 English Policy Research working paper ; no. WPS 5991 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank Publications & Research :: Policy Research Working Paper South Asia South Asia South Asia Asia Sri Lanka |