Does Formality Improve Micro-Firm Performance? Quasi-Experimental Evidence from the Brazilian SIMPLES Program

37 Pages Posted: 9 Nov 2009

See all articles by Pablo Fajnzylber

Pablo Fajnzylber

World Bank - Economic Development Institute; Federal University of Minas Gerais

William F. Maloney

World Bank - Poverty and Economic Management Unit; IZA Institute of Labor Economics; World Bank - Development Research Group (DECRG)

Gabriel V. Montes Rojas

University of Illinois at Urbana-Champaign

Abstract

This paper employs regression discontinuity methods to identify the effect of formality on Brazilian micro-firm performance. The SIMPLES program introduced in November 1996 consolidated multiple taxes and social security contributions into a single payment and reduced taxes for eligible small firms. This provides a quasi-natural experiment that allows us to eliminate many of the endogeneity issues surrounding the impact of formality, measured across several dimensions, on firm performance. We find that SIMPLES had a significant effect on the proportion of firms that have a license to operate, are registered as a legal entity, pay taxes and make social security contributions. Moreover, newly created firms that opt for operating formally achieve 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 greater permanence and a larger paid labor force.

Keywords: micro-firms, self-employment, informality

JEL Classification: J23, L25

Suggested Citation

Fajnzylber, Pablo R. and Maloney, William F. and Montes Rojas, Gabriel V., Does Formality Improve Micro-Firm Performance? Quasi-Experimental Evidence from the Brazilian SIMPLES Program. IZA Discussion Paper No. 4531. Available at SSRN: https://ssrn.com/abstract=1501967

Pablo R. Fajnzylber (Contact Author)

World Bank - Economic Development Institute ( email )

1818 H Street
Washington, DC 20433
United States

Federal University of Minas Gerais ( email )

Rua Curitiba, 832
CEDEPLAR 9 Andar
MG30170-120 Belo Horizonte
Brazil
+55 31 32799162 (Phone)

William F. Maloney

World Bank - Poverty and Economic Management Unit ( email )

1818 H Street NW
Washington, DC 20433
United States
202-473-6340 (Phone)
202-522-0054 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

Gabriel V. Montes Rojas

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

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