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

By Gustavo Henrique de Andrade, Miriam Bruhn, David J. McKenzie. Social Science Research Network, 2013

353 citations recorded by the source corpus.

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. This paper reports on a field experiment conducted 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. The analysis finds zero or negative impacts of information and free cost treatments, and a significant but small increase in formalization from inspections. Estimates of the impact of actually receiving an inspection give a 21 to 27 percentage point increase in the likelihood of formalizing. The results show most informal firms will not formalize unless forced to do so, suggesting formality offers little private benefit to them. But the tax revenue benefits to the government of bringing firms of this size into the formal system more than offset the costs of inspections.

Subfields: Accounting, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/779fa078d6ac640701b3fd4cadb2979c4ff0255e

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Citations in the corpus

Entry Regulation and the Formalization of Microenterprises in Developing Countries (2013, positive): “In Belo Horizonte, Brazil, Andrade et al. (2013) provided information, had the government waive all registration costs and sanitary and inspection taxes for the first year (approximately US$200), and provided free mandatory accounting services for the first year (approximately US$1800).”
Rethinking Indonesia's Informal Sector (2016, neutral): “Finally, in an experiment in Brazil, de Andrade et al. (2013) evaluating the effectiveness of providing information about registration, combining information with paying registration costs, threatening firms with an enforcement visit from a municipal inspector, and threatening neighboring firms with”
Informality and Development (2014, neutral): “De Andrade et al. (2013) report that the likelihood of registering increases by 21 to 27 percentage points if the firm receives an actual inspection, but it is unaffected by the other three interventions.”
Do Interventions Targeted at Micro-Entrepreneurs and Small and Medium-Sized Firms Create Jobs? A Systematic Review of the Evidence for Low and Middle Income Countries (2014, neutral): “Complementary evidence comes from Andrade et al. (2013), a study not included in our systematic review because it does not assess employment effects, who directly tested the effectiveness of various treatments intended to increase formality in Brazil based on an RCT .”
Determinants of the Level of Informality of Informal Micro-Enterprises: Some Evidence from the City of Lahore, Pakistan (2016, neutral): “…and enterprises often display varying levels of informality in that they conform to the formal rules and regulations in some regards but not others (Andrade et al 2013; Bruhn & McKenzie 2013; Kanbur 2009; Ram et al 2002a,b; Small Business Council 2004; Verreyne et al 2014; de Villiers Scheepers et…”