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Does inducing informal firms to formalize make sense? Experimental evidence from Benin

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Listed:
  • Benhassine, Najy
  • McKenzie, David
  • Pouliquen, Victor
  • Santini, Massimiliano

Abstract

Efforts to bring informal firms into the formal sector are often based on a view that this will bring benefits to the firms themselves, or at least benefit governments through increasing the tax base. A randomized experiment based around the introduction of the entreprenant legal status in Benin is used to test these assumptions, along with supplementary efforts to enhance the presumed benefits of formalizing to firms. Few firms register when just given information about the new regime, but our full package of supplementary efforts boosts formalization by 16.3 percentage points. However, this formalization does not bring firms higher sales or profits, and the cost of formalizing these firms exceeds the added taxation they will pay over the next decade. We show how better targeting of these policies towards firms that look more like formal firms to begin with can increase the formalization rate and improve cost-effectiveness.

Suggested Citation

  • Benhassine, Najy & McKenzie, David & Pouliquen, Victor & Santini, Massimiliano, 2018. "Does inducing informal firms to formalize make sense? Experimental evidence from Benin," Journal of Public Economics, Elsevier, vol. 157(C), pages 1-14.
    • Handle: RePEc:eee:pubeco:v:157:y:2018:i:c:p:1-14
    DOI: 10.1016/j.jpubeco.2017.11.004
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    References listed on IDEAS

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    More about this item

    Keywords

    Informality; Small enterprises; Regulatory simplification;
    All these keywords.

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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