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

This status includes tax registration and offers benefits such as access to bank accounts, government programs, and tax certainty. A randomized experiment was conducted to test the effectiveness of offering supplementary services to enhance the take-up and returns to formalization. The experiment involved a sample of 3,600 informal businesses, which were randomized into a control group and three treatment groups. The first treatment group received in-person visits and information about the benefits of formalization. This intervention resulted in a 9.6 percentage point increase in the number of firms that registered for the entreprenant status compared to the control group. The second treatment group received the in-person visits and information, as well as assistance with opening bank accounts and tax mediation services. This intervention resulted in a 16.3 percentage point increase in the number of firms that registered for the entreprenant status compared to the control group. The results suggest that offering supplementary services can enhance the benefits of formalization and induce more firms to formalize. The experiment also found that larger firms and those that looked more like formal firms to begin with were more likely to formalize. However, the benefits of formalization appeared to be limited for the firms, and the costs of personalized assistance were high. This suggests that enhanced formalization efforts may not pass cost-benefit tests. The findings of this study have implications for policy makers seeking to reduce informality and promote formalization in developing countries. The results suggest that offering supplementary services can enhance the benefits of formalization and induce more firms to formalize. However, the costs of these services must be carefully considered to ensure that they are effective and efficient. The entreprenant legal status was launched in 17 African states with the goal of making it easier for small informal businesses to enter the formal economy. The regime includes tax registration and offers benefits such as access to bank accounts, government programs, and tax certainty. The experiment was conducted in Benin, where the informal sector represents up to 70 percent of GDP and 95 percent of employment. The study highlights the need for supplementary services to enhance formalization assistance, particularly in the context of tax registration. The results suggest that offering assistance with opening bank accounts and tax mediation services can enhance the benefits of formalization and induce more firms to formalize. However, the costs of these services must be carefully considered to ensure that they are effective and efficient. The study also highlights the importance of targeting formalization policies towards larger firms and those that look more like formal firms to begin with. These firms are more likely to formalize and may benefit more from the formalization process. However, the benefits of formalization appeared to be limited for the firms, and the costs of personalized assistance were high. This suggests that enhanced formalization efforts may not pass cost-benefit tests. The study contributes to the existing literature on informality and formalization in developing countries. The results suggest that offering supplementary services can enhance the benefits of formalization and induce more firms to formalize. However, the costs of these services must be carefully considered to ensure that they are effective and efficient. The study highlights the need for further research on the effectiveness of formalization policies and the costs of personalized assistance.