Does formality improve micro-firm performance? Evidence from the Brazilian SIMPLES program

By Pablo Fajnzylber, William F. Maloney, Gabriel Montes-Rojas. 2011

282 citations recorded by the source corpus.

This paper exploits an extensive Brazilian micro-enterprise survey and the 1996 introduction of a business tax reduction and simplification scheme (SIMPLES) to examine three questions. First, do high tax rates and complex tax regulations really constitute a barrier to the formalization of micro-firms? Second, does formalization improve firm performance measured along several dimensions, including revenues, employment and capital stock? Third, what are the channels through which this occurs? We find that SIMPLES led to a significant increase in formality in several dimensions. Moreover, newly created firms that opt for operating formally show higher levels of revenue and profits, employ more workers and are more capital intensive (only for those firms that have employees). The channel through which this occurs is not access to credit or contracts with larger firms. Rather, it appears that the lower cost of contracting labor leads to adopting production techniques that involve a permanent location and a larger paid labor force.

Subfields: Accounting, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/818e8d647402a05df2f9d21ab3e98e32ad808840

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Citations in the corpus

Informal Entrepreneurship in Developing Economies: The Impacts of Starting up Unregistered on firm Performance (2017, background): “…markets, property rights, training from formal institutions (for which informal institutions cannot act as an efficient substitute), belonging to business associations, contracts with large firms, and the ability to become more capital-intensive (Fajnzylber et al., 2011; Skousen & Mahoney, 2015).”
Margins of labor market adjustment to trade (2019, background): “It is more capital intensive, dynamic, and productive than the informal sector, and formal jobs are generally seen as being of much higher quality than informal jobs (LaPorta and Schleifer, 2008; Bacchetta et al., 2009; Fajnzylber et al., 2011; LaPorta and Schleifer, 2014).”
Entry Regulation and the Formalization of Microenterprises in Developing Countries (2013, background): “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).”
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, background): “For Brazil, Fajnzylber et al. (2011) find that, among those firms that do formalize, performance improves in terms of revenue and profits.”
Firms, Informality, and Development: Theory and Evidence from Brazil (2018, background): “5See Rauch (1991), Fortin et al. (1997), Amaral and Quintin (2006), de Paula and Scheinkman (2010, 2011), and Galiani and Weinschelbaum (2012), among others.”
Latin America's Social Policy Challenge: Education, Social Insurance, Redistribution (2013, background): “…shows that productivity in the informal sector is lower than in the formal one, so any resource movements from the former to the latter will tend to lower aggregate productivity (Fajnzylber, Maloney, and Montes-Rojas 2009, 2011; Busso, Fazio, and Levy 2012; Jung and Tran 2012; Pagés 2010).”
The Benefits of Formalization: Evidence from Vietnamese Manufacturing SMEs (2012, background): “RESULTS (a) Profits As shown in previous studies (Fajnzylber et al., 2011; McKenzie & Sakho, 2010) firm benefits of operating officially include higher profits, better access to credit, increased investments and higher customer demand (due to the ability of formal firms to issue VAT invoices).”
The Demand for, and Consequences of, Formalization Among Informal Firms in Sri Lanka (2012, background): “Fajnzylber et al. (2011) analyze a simplification program in Brazil and find that the firms which open just after a reform are larger and more likely to operate in a permanent location - a finding which they interpret as evidence that formalization improves firm performance, but which could also be…”
A Helping Hand or the Long Arm of the Law? Experimental Evidence on What Governments Can Do to Formalize Firms (2013, unknown): “Fajnzylber et al. (2011) and Monteiro and Assunção (2011) both analyze the impact of the SIMPLES program on firms, finding that firms created after the reform invest more, were larger and more likely to operate in a permanent location than firms created just before the reform.”
Informality: Causes and Consequences for Development (2020, background): “Piza (2018) revisits the results of Monteiro & Assunção (2012) and Fajnzylber et al. (2011), highlighting the threats to identification and confounding factors that were not accounted for in these studies.”