On the Effect of the Costs of Operating Formally: New Experimental Evidence

29 Pages Posted: 13 Jun 2015 Last revised: 1 Jan 2016

See all articles by Sebastian Galiani

Sebastian Galiani

University of Maryland - Department of Economics

Marcela Melendez

Universidad de los Andes, Colombia

Camila Navajas Ahumada

University of California, San Diego (UCSD) - UC San Diego

Multiple version iconThere are 2 versions of this paper

Date Written: January 2016

Abstract

This paper analyzes the impact of the elimination of the initial fixed costs of registration on the decision of informal firms to operate formally in Bogotá, Colombia. The Chamber of Commerce of Bogotá (CCB) conducts workshops for prospective formal-sector entrants and arranges personalized meetings for them with CCB agents. The CCB’s decision to significantly reduce the transaction costs of registration and the entry into force of Act No. 1429 of 2010, which eliminated the costs of the initial procedure for registering as a formal enterprise and provided exemptions from relevant taxes during the first years after formalization, provided us with an ideal experiment for studying how the elimination of the initial fixed costs of formalization would influence firms’ decision to operate formally or not. We obtained two important results. First, while a workshop treatment had no effect on firms’ formalization decisions, meetings at the firm with CCB agents raised the likelihood that a business would begin to operate formally by 5.5 percentage points for all the firms that were invited, at random, to participate in this arm of the intervention and by 32 percentage points for the firms that accepted the invitation. Second, the effect on the treatment firms did not persist over time. After a year of formal operation, it disappeared. These results indicate that substantial reductions in the fixed costs of operating formally are not effective in formalization choices, since such reductions had no lasting effect on formalization decisions.

Keywords: Informality, randomized control trial (RCT), registration costs and sustainability

JEL Classification: J46, J21

Suggested Citation

Galiani, Sebastian and Melendez, Marcela and Navajas Ahumada, Camila, On the Effect of the Costs of Operating Formally: New Experimental Evidence (January 2016). Available at SSRN: https://ssrn.com/abstract=2617874 or http://dx.doi.org/10.2139/ssrn.2617874

Sebastian Galiani (Contact Author)

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

Marcela Melendez

Universidad de los Andes, Colombia ( email )

Carrera Primera # 18A-12
Bogota, DC D.C. 110311
Colombia

Camila Navajas Ahumada

University of California, San Diego (UCSD) - UC San Diego ( email )

9500 Gilman Dr., 0519
La Jolla, CA 92093-0519
United States

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