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American Economic Journal: Applied Economics: Vol. 5 No. 2 (April 2013)

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

Article Citation

de Mel, Suresh, David McKenzie, and Christopher Woodruff. 2013. "The Demand for, and Consequences of, Formalization among Informal Firms in Sri Lanka." American Economic Journal: Applied Economics, 5(2): 122-50.

DOI: 10.1257/app.5.2.122

Abstract

A field experiment in Sri Lanka provides informal firms incentives to formalize. Information about the registration process and reimbursement of direct costs does not increase registration. Payments equivalent to one-half to one month (alternatively, two 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 that grew rapidly. We find little evidence for other changes in behavior, but formalized firms express more trust in the state. (JEL C93, D22, L25, L26, O14)

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Authors

de Mel, Suresh (U Peradeniya)
McKenzie, David (World Bank)
Woodruff, Christopher (U Warwick)

JEL Classifications

C93: Field Experiments
D22: Firm Behavior: Empirical Analysis
L25: Firm Performance: Size, Diversification, and Scope
L26: Entrepreneurship
O14: Industrialization; Manufacturing and Service Industries; Choice of Technology

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