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

36 Pages Posted: 28 Apr 2012 Last revised: 27 Oct 2014

See all articles by Suresh de Mel

Suresh de Mel

University of Peradeniya

David J. McKenzie

World Bank - Development Research Group (DECRG); IZA Institute of Labor Economics

Christopher Woodruff

University of Warwick; Centre for Economic Policy Research (CEPR)

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Date Written: April 2012

Abstract

We conduct a field experiment in Sri Lanka providing informal firms incentives to formalize. Information about the registration process and reimbursement of direct costs has no effect. Payments equivalent to one-half to one month (alternatively, 2 months) of the median firm's profits leads to registration of around one-fifth (alternatively, one-half) of firms. Land ownership issues are the most common reason for not registering. Follow-up surveys 15 to 31 months later show higher mean profits, but largely in a few firms which grew rapidly. We find little evidence for other changes in behavior, but formalized firms express more trust in the state.

Suggested Citation

de Mel, Suresh and McKenzie, David John and Woodruff, Christopher, The Demand for, and Consequences of, Formalization Among Informal Firms in Sri Lanka (April 2012). NBER Working Paper No. w18019, Available at SSRN: https://ssrn.com/abstract=2047270

Suresh De Mel (Contact Author)

University of Peradeniya ( email )

University of Peradeniya
Dept of Economics & Statistics
Peradeniya
Sri Lanka
+94 81 2392622 (Phone)

David John McKenzie

World Bank - Development Research Group (DECRG) ( email )

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

IZA Institute of Labor Economics ( email )

P.O. Box 7240
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Germany

Christopher Woodruff

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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