de Mel, Suresh, McKenzie, David and Woodruff, Christopher M. What is the cost of formality? Experimentally estimating the demand for formalization. Working Paper. UNSPECIFIED.. (Unpublished)

Abstract

We report on the results of a field experiment in Sri Lanka in which we stimulated formal registration of informal firms with fewer than 15 employees by providing information and incentive payments. The direct monetary and time costs of registration in Sri Lanka are modest. Moreover, for the median firm in our sample, registration implies no additional tax payments. Nevertheless, we find that providing information and reimbursement for direct registration costs is not sufficient to induce registration. Only one of 78 firms provided this treatment chose to register. Payments of one-half to one month’s (median firm’s) profit did induce significant registration, with around one-fifth of firms registering. A larger payment of two month’s (median firm’s) profit induced half of the firms to register. Among the firms not registering after being offered this larger incentive, most faced issues related to ownership of land. These results suggest that firms are making rational decisions with regard to registration, and that the benefits of remaining informal are perceived as relatively modest by most of the enterprises. The results are not consistent with the view that formalization is largely the result of burdensome registration costs, and that firms suffer from their informal status.

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