Location of Repository

Does Formality Improve Micro-Firm Performance? Quasi-Experimental Evidence from the Brazilian SIMPLES Program

By Pablo Fajnzylber, William F. Maloney and Gabriel V. Montes-Rojas

Abstract

This paper employs regression discontinuity methods to identify the effect of formality on Brazilian micro-firm performance. The SIMPLES program introduced in November 1996 consolidated multiple taxes and social security contributions into a single payment and reduced taxes for eligible small firms. This provides a quasi-natural experiment that allows us to eliminate many of the endogeneity issues surrounding the impact of formality, measured across several dimensions, on firm performance. We find that SIMPLES had a significant effect on the proportion of firms that have a license to operate, are registered as a legal entity, pay taxes and make social security contributions. Moreover, newly created firms that opt for operating formally achieve higher levels of revenue and profits, employ more workers and are more capital intensive (only for those firms that have employees). The channel through which this occurs is not access to credit or contracts with larger firms. Rather, it appears that the lower cost of contracting labor leads to adopting production techniques that involve greater permanence and a larger paid labor force.micro-firms, self-employment, informality

OAI identifier:

Suggested articles

Preview

Citations

  1. (2006). Are burdensome registration procedures an important barrier on firm creation? Evidence from Mexico." SIEPR Discussion Paper 06-13;
  2. (2009). Do entry costs provide an empirical basis for poverty traps? Evidence from Mexican microenterprises. Economic Development and Cultural Change
  3. (2005). Enforcement of labor regulation, informal labor, and firm performance. World Bank Policy Research Working Paper 3756;
  4. (2002). Estimating the effect of financial aid offers on college enrollment: A regression-discontinuity approach.
  5. Experimental evidence on returns to capital and access to finance in Mexico. World Bank Economic Review 2008;22;457–482.
  6. (2004). Lessons for Latin America and the Caribbean. The University of Chicago Press: London;
  7. (2008). License to sell: the effect of business registration reform on entrepreneurial activity in Mexico. World Bank Policy Research Working Paper Series 4538;
  8. (1997). Outgoing the shadows: Estimating the impact of bureaucracy simplification and tax cut on formality and investment.
  9. (2006). Regímenes especiales de tributación para pequeños contribuyentes en América Latina. Banco Interamericano de Desarrollo;
  10. (2009). Releasing constraints to growth or pushing on a string? Policies and performance of Mexican micro-firms.
  11. (2005). Testing for weak instruments in linear IV regression. In:
  12. (2004). The hidden dangers of the informal economy.
  13. (2005). The impact of regulation on growth and informality - cross-country evidence. World Bank Policy Research Working Paper 3623;
  14. The informal sector in developed and less developed countries: a literature survey.
  15. (1988). The informal sector, firm dynamics and institutional participation. World Bank Policy Research Working Paper
  16. (2007). The informal sector. NBER Working Paper 13486;
  17. (1989). The other path: The invisible revolution in the Third World. Harper and Row:

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.