The Demand for, and Consequences of, Formalization among Informal Firms in Sri Lanka

Suresh de Mel · David John McKenzie · Christopher Woodruff

321 citations0/0 files storedAmerican Economic Journal Applied Economics

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Taxation and Compliance Studies Experimental Behavioral Economics Studies Law, Economics, and Judicial Systems

Abstract

A field experiment in Sri Lanka provides informal firms incentives to formalize. Information about the registration process and reimbursement of direct costs does not increase registration. Payments equivalent to one-half to one month (alternatively, two 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 that grew rapidly. We find little evidence for other changes in behavior, but formalized firms express more trust in the state. (JEL C93, D22, L25, L26, O14)

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References

2009Misallocation and Manufacturing TFP in China and India *2000The Regulation of Entry 2007Misallocation and Manufacturing TFP in China and India 2006Entry regulation as a barrier to entrepreneurship 2004Informality Revisited 2008Returns to Capital in Microenterprises: Evidence from a Field Experiment *2007Informality : Exit and Exclusion 2008Good intentions, bad outcomes: social policy, informality, and economic growth in Mexico

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