Exit from Informality: The Stick Treatment

Research Note
Published on 7 February 2017

Abstract

Most firms are informal throughout the developing world; and most small and medium enterprises (SMEs) (60-80%) do not register with tax authorities, lowering the tax base. This remains a persistent phenomenon despite the numerous attempts made to encourage registration. While those interventions focused largely on a carrot approach, we tested the effectiveness of a stick intervention. The latter involves threat of fines if caught SME still not registered after a grace period. Our intervention increased the rate of registration, but the overall number of registered firms remained quite small.

Authors

Giacomo de Giorgi

University of Geneva

Aminur Rahman

World Bank

Matthew Ploezke

Harvard University