Can Enhancing the Benefits of Formalization Induce Informal Firms to Become Formal? Experimental Evidence from Benin

60 Pages Posted: 2 Dec 2016 Last revised: 27 Apr 2018

See all articles by Najy Benhassine

Najy Benhassine

Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA)

David J. McKenzie

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

Victor Pouliquen

World Bank

Massimiliano Santini

World Bank Group

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Date Written: November 29, 2016

Abstract

Governments around the world have introduced reforms to attempt to make it easier for informal firms to formalize. However, most informal firms have not gone on to become formal, especially when tax registration is involved. A randomized experiment based around the introduction of the entreprenant legal status in Benin is used to provide evidence from an African context on the willingness of informal firms to register after introducing a simple, free registration process, and to test the effectiveness of supplementary efforts to enhance the presumed benefits of formalization by facilitating its links to government training programs, support to open bank accounts, and tax mediation services. Few firms register when just given information about the new regime, but 9.6 percentage points more register when they were visited in person and the benefits were explained. The full package of supplementary efforts boosts the impact on the formalization rate to 16.3 percentage points, demonstrating that enhancing the benefits of formalization does induce more firms to formalize. Firms that are larger, and that look more like formal firms to begin with, are more likely to formalize, providing guidance for better targeting of such policies. However, formalization appears to offer limited benefits to the firms, and the costs of personalized assistance are high, suggesting that such enhanced formalization efforts are unlikely to pass cost-benefit tests.

Keywords: Economic Adjustment and Lending, Taxation & Subsidies, Macro-Fiscal Policy, Business in Development, International Trade and Trade Rules, Tax Administration, Public Sector Economics, Public Finance Decentralization and Poverty Reduction, Tax Law, Educational Sciences

Suggested Citation

Benhassine, Najy and McKenzie, David John and Pouliquen, Victor and Santini, Massimiliano, Can Enhancing the Benefits of Formalization Induce Informal Firms to Become Formal? Experimental Evidence from Benin (November 29, 2016). World Bank Policy Research Working Paper No. 7900, Available at SSRN: https://ssrn.com/abstract=2878252

Najy Benhassine (Contact Author)

Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA) ( email )

77 Massachusetts Avenue
Cambridge, MA 02139-4307
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David John McKenzie

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

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IZA Institute of Labor Economics ( email )

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Victor Pouliquen

World Bank

1818 H Street, NW
Washington, DC 20433
United States

Massimiliano Santini

World Bank Group ( email )

1818 H Street NW
Washington, DC 20433
United States

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