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How Should the Government Bring Small Firms into the Formal System Experimental Evidence from Malawi (English)

Developing country governments seek to reduce the pervasive informality of firms for multiple reasons: increasing the tax base, helping firms access formal markets and grow, increasing the rule of law, and as a means to obtain data that can be used for other government functions. However, there is debate as to the best approach for achieving these goals. This study conducted a randomized experiment in Malawi to test three alternatives: (a) assisting firms to obtain a business registration certificate that offers access to formal markets but imposes no tax obligations; (b) assisting firms to obtain business registration and tax registration; and (c) supplementing the assistance to obtain business registration with a bank information session intended to help firms utilize one of the key potential benefits of formalizing. The study finds incredibly high demand for obtaining a formal status that is separate from tax obligations, and very low take-up of tax registration. Business registration alone has no impact on access to formal markets or firm performance. However, coupling registration assistance with the bank information session increases the use of formal financial services, and results in increases in firm sales by 20 percent and profits by 15 percent. The results highlight the advantages of separating business and tax registration, but also the need to assist firms in benefiting from their new formal status.


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    Campos,Francisco Moraes Leitao, Goldstein,Markus P., Mckenzie,David J.

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    Policy Research Working Paper

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    How Should the Government Bring Small Firms into the Formal System ? Experimental Evidence from Malawi

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    Micro and Small Enterprises; access to bank account; access to financial service; Rule of Law; increase in profit; formal financial service; treatment group; local city council; chamber of commerce; tax registration; business development service; fixed exchange rate; raising tax revenue; impact evaluation design; taxpayer identification number; net present value; types of reforms; concentrations of firm; family and friends; impact of tax; journal of finance; financial education program; informal financial institution; role of bank; form of tax; forms of registration; formal banking system; terms of use; business support program; business training program; Business Enabling Environment; constraints to growth; take-up rate; informal firms; monthly profit; transaction cost; business performance; tax base; baseline survey; tax authorities; tax authority; Financial Access; private bank; transport cost; registration process; tax obligation; firm performance; treatment effect; point estimate; government function; registration form; government contract; pay taxes; formal system; business license; female business; multiple testing; informal sector; discount rate; physical separation; trading market; tax due; malawian kwacha; attrition rates; Cash Transfer; application form; payment delays; bank access; banking information; inspection process; standard deviation; open bank; fixed effect; registration application; bus ride; individual level; firm level; commercial capital; standard error; research assistance; entry regulation; industrial park; summary statistic; firm sale; financial history; average profit; turnover tax; sample household; hardware shops; agricultural produce; Retail Sector; collected information; development policy; information barriers; women entrepreneurship; positive impact; tax payment; infrastructure planning; registration fee; international community; increased access; budget support; individual entrepreneur; open access; cost structure; business loan; paper trail; enforcement capacity; tax purpose; government institution; targeting program; high compliance; tax enforcement; formal tax; high tax; information problem; formal economy; field experiment; tax treatment; tracer study; Public Goods; societal benefit; government response; commercial bank; differential impact; business facilitation; national tax; public economics; temporary tax; imperfect information; tax status; electronic system; informal mechanism; high share; export license; business environment; informal enterprise; formal finance; turnaround time; health coverage; female control; private benefit; automated system; record keeping; financial inclusion



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Campos,Francisco Moraes Leitao Goldstein,Markus P. Mckenzie,David J.

How Should the Government Bring Small Firms into the Formal System Experimental Evidence from Malawi (English). Policy Research working paper,no. WPS 8601,Paper is funded by the Strategic Research Program (SRP),Impact Evaluation series Washington, D.C. : World Bank Group.