In developing countries a large majority of small and medium firms operate in the informal sector. In Benin, this is particularly the case and the national statistics agency estimated that the informal sector represented up to 70% of the GDP and 95% of employment in 2009. This evaluation takes advantage of the creation of a new legal status for small firms by the Government of Benin to study the impact of three different packages of formalization incentives on formalization rate and firm performances. 3,600 informal businesses operating in Cotonou have been randomly allocated into three treatment and one control groups.
Policy implications
Introducing a new legal status to incentivise firms to formalise appears to be only be effective when implemented in parallel to formalisation interventions, but these activities' cost could exceed the income raised from additional tax revenues.
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Additional information
Reference
Benhassine, N., McKenzie, D., Pouliquen, V., & Santini, M. (2018). Does inducing informal firms to formalize make sense? Experimental evidence from Benin. Journal of Public Economics, 157, 1-14.