Enabling Local Fiscal Capacity through Business Formalization

En Español

Background

Micro and small enterprises account for a large share of employment in Colombia. In an effort to both strengthen these businesses and increase their fiscal contribution, recent policy efforts have simplified the formalization process and reduced renewal fees. Unfortunately, many businesses remain uninformed about the process, these policy changes, and the benefits to formalizing. A recent study in Bogotá, found that a majority of businesses do not even know about business licenses; over 10 percent of informal businesses wrongly assumed they had already formalized (Galiani, Meléndez and Navajas Ahumada 2017). Research from other contexts finds that direct outreach and support to micro and small enterprises can substantially increase formalization rates. In Benin, Benhassine et al. (2018) find that in-person visits to firms increased formalization rates (measured two years later) by roughly 10 percentage points. Drawing on these insights, we evaluate whether direct outreach to micro and small enterprises increases formalization rates in businesses found in the southern outskirts of Bogotá. We also pair this outreach with additional support that helps businesses realize the benefits of formalizing.

Intervention Date: February – April 2019

Research Design

In the study area, many small businesses are currently operating informally. We consider one important dimension of informality: the lack of registration with the local chamber of commerce. If businesses formalize, they will pay a fee and ultimately receive a matrícula mercantil. We partner with a local organization that promotes business formalization in the area and randomize in-person visits to businesses by trained agents, who encourage formalization. In the main treatment arm, our implementing partner’s agents share information about the potential benefits of registering the business, conduct a brief diagnostic survey, and provide a detailed explanation of the steps and documentation required to register the business.

Hypotheses

We plan to test the following common hypotheses, where the common treatment arm is defined as being approached and offered our implementing partner’s formalization service. Primary hypotheses:

• (M-H1) Common treatment arm increases citizens’ intent to formalize their relationship with the government
• (M-H2) Common treatment arm increases citizens’ formalization of their relationship with the government
• (M-H3) Common treatment arm increases citizens’ access to public services tightly related to the formalization process
• (M-H4) Common treatment arm increases citizens’ tax compliance

Secondary hypotheses:

• (M-H5) Common treatment arm increases citizen’s access to other public services
• (M-H6) Common treatment arm improves citizen’s tax morale more generally, and increases willingness to pay taxes not directly involved with the formalization process

Findings