Finance & PSD Impact NOVEMBER 2016 The Lessons from DECFP Impact Evaluations ISSUE 37 Our latest note tests different ways to get firms to take-up a new formal status for entrepreneurs in Benin Enhancing the Benefits of Formalization under a new status in Benin Najy Benhassine, David McKenzie, Victor Pouliquen and Massimiliano Santini Existing evidence suggests that easing entry obtain a sample of 3,596 informal businesses. regulations and providing information on the These were randomized into four groups: formalization process has had only very  A control group of 1,197 firms limited impacts on the formalization of  Treatment group 1: received an in-person existing informal firms, especially with visit explaining the benefits of formalizing, regards to tax registration. and help with registering if needed. One explanation is that although, in  Treatment group 2: received the in-person theory, formality has advantages in terms of visit, and also facilitated access to access to business banking, government government training programs, and support training programs, and tax certainty, in to open a business bank account designed for practice many firms which formalize fail to the entreprenant. receive these benefits. As a result, the costs of formalization exceed the benefits, and so  Treatment group 3: in addition to the services most firms stay informal. provided to groups 1 and 2, was also offered support in dealing with the tax authorities The Entreprenant Program including tax mediation services. Benin, along with 16 other OHADA countries in Africa, revised their commercial We later also implemented a law to introduce a new status called subsequent treatment to test whether entreprenant. This status is designed for information alone improved take-up by micro and small businesses, and registering giving half the control group leaflets with this new status is easy, free of charge explaining the new status. and takes only one business day. Formalizing Monthly administrative data on means firms gain access to many of the key formalization allows us to trace out the benefits of formal status, but also makes the formalization response, while follow-up firm registered for tax purposes. surveys one and two years after baseline The World Bank and IFC worked enable us to measure impacts on firm with the Government of Benin to pilot outcomes. different approaches for how this status should be operationalized, and we use this Results opportunity to test via a randomized  Information alone has almost no effect on experiment whether offering supplementary formalization. Adding the supplementary services can enhance the benefits of services did lead to large increases in formalizing for firms and bring more of them take-up of the new status. The most into the formal system. comprehensive package of services (Group 3) boosted the formalization rate Intervention Design by 16.3 percentage points (Figure 1). We used a listing survey of businesses around Cotonou in early 2014 to Do you have a project you want evaluated? DECRG-FP researchers are always looking for opportunities to work with colleagues in the Bank and IFC. If you would like to ask our experts for advice or to collaborate on an evaluation, contact us care of the Impact editor, David McKenzie (dmckenzie@worldbank.org) Figure 1. Formalization rates  However, formal firms are not significantly more likely to obtain 25 business bank accounts or loan financing, 20 do not gain more customers, and have no Percent Formalizing significant gains in sales, profits, or 15 standard of living. 10 Policy Implications 5 The new entreprenant status does 0 offer an improvement for those firms that Control Group 1 Group 2 Group 3 want to become formal, making the process Note: Error bars show 95% confidence intervals easier and cheaper. However, the existence of this status alone is not enough to induce many  We use pre-specified tests of existing informal firms to formalize. heterogeneity in take-up to learn how The supplementary services we tested governments could best target these do increase these formalization rates. services. We find the impact on However, while the benefits of formalizing formalizing is higher for male business are modest, the cost of the intervention is not. owners, those with more education, those We calculate an average cost of US$1,200- operating outside the biggest market in 2,200 per firm formalized without targeting, Cotonou, and those that we classified ex- and at least $600 per firm formalized even if ante as being more similar to already targeting were used. This is large relative to formal businesses. Targeting on these the average monthly profits of these firms of characteristics could boost the only $79 and to the tax collection the formalization impact to 27 percentage government can expect to receive from such points. firms. As such, our analysis suggests that  Even with this targeting then, most adding additional services or in-person visits informal firms choose to remain so. to explain this new status is unlikely to pass a  Formalizing leads to increased cost-benefit test. participation in business training, more Alternative strategies, including formal accounting, lower tax harassment, targeted enforcement may be needed to bring and less taxes paid (due to a tax more of the larger informal firms into the exemption in the year after formalizing). formal system. For further reading see: Benhassine et al. (2016) “Can Enhancing the Benefits of Formalization Induce Informal Firms to Become Formal? Experimental Evidence from Benin.” World Bank Policy Research Working Paper no. 7900 Recent impact notes are available on our website: http://econ.worldbank.org/programs/finance/impact