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The Demand for, and Consequences of, Formalization Among Informal Firms in Sri Lanka | CFSP | Consortium on Financial Systems and Poverty

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

Suresh de Mel
David McKenzie
Robert M. Townsend
Publication Type: 
Working Papers
Journal Name: 
NBER Working Paper No. 18019
Publication Year: 
2012

 

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.

Region: 
South and Central Asia
Country: 
Sri Lanka
Topic: 
Experiments
Topic: 
Informal Economy