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

de Mel, Suresh ; McKenzie, David ; Woodruff, Christopher

关键词: ACCESS TO BANKS;    ACCESS TO CREDIT;    ACCOUNTING;    ADVERTISING;    AGRICULTURE;   

DOI  :  10.1596/1813-9450-5991
RP-ID  :  WPS5991

学科分类：社会科学、人文和艺术（综合）

来源: World Bank Open Knowledge Repository

【 摘 要 】

The majority of firms in most developingcountries are informal. The authors of this paper conducteda field experiment in Sri Lanka that provided incentives forinformal firms to formalize. Offering only information aboutthe registration process and reimbursement for directregistration costs had no impact on formalization. Addingpayments equivalent to one-half to one month's profitsfor the median firm led to registration of around one-fifthof firms. A larger payment equivalent to two months'median profits induced half the firms to register. The mainreasons for not formalizing when offered incentives includedissues related to ownership of land and concerns aboutfacing labor taxes in the future. The degree of bureaucracyin the registration process also seems to matter for thosewith the incentive to register, with response to theincentives higher in Colombo, where the registration processwas easier, than in Kandy. Three follow-up surveys, at 15 to31 months after the intervention, measure the impact offormalizing on these firms. Although mean profits increased,this appears largely due to the experiences of a few firmsthat grew rapidly, with most firms experiencing no increasein income as a result of formalizing. The authors also findlittle evidence for most of the channels through whichformalization is hypothesized to benefit firms, althoughformalized firms do advertise more and are more likely touse receipt books. In qualitative interviews owners offormalized firms also feel their businesses have morelegitimacy. Finally, formalizing is found to result in alarge increase in trust in the state. Their focus is largelyon the private costs and benefits of existing firmsformalizing. Within their sample they cannot measure broaderimpacts of formalization on other firms (who may prosperfrom not having to compete against informal firms not payingtaxes), nor impacts of easier formalization on entry of newfirms. Nevertheless, our results suggest that although mostinformal firms do not want to formalize, given the currentprivate costs and benefits of formalizing, policy effortsthat lead to relatively modest increases in the net benefitsof formalizing would induce a sizeable share of informalfirms to formalize.