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. Thanks to a randomized
experiment based around the introduction of the
entreprenant legal status in Benin, this paper by Benhassine, McKenzie, Pouliquen and Santini (2016) provides 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.