Increasing Microentrepreneurs’ Formalization and Access to Social Security in Brazil

En Español

Background

Business informality may not only impede the growth of small firms but might also lead to long-term undercoverage of social security, as informal microentrepreneurs typically do not make any social security contributions. The Brazilian Government has made efforts to address informality among the country’s microentrepreneurs. Since 2009, self-employed and micro-entrepreneurs, who hire up to one employee are allowed to register as an “individual microentrepreneur” (Microempreendedor Individual or MEI). The MEI program incentives formalization through a combination of 1) subsidized contribution to social security, 2) the exemption from income taxes and 3) a simple and reduced monthly flat rate payment in lieu of other business taxes. Despite the unique set-up of this formalization program, formalization of microentrepreneurs in poorer socio-demographic areas is still low. The study evaluates a series of interventions that facilitates the take-up of the formalization program and encourages payment of monthly contributions by microentrepreneurs in Rio das Pedras, Rio de Janeiro. These interventions are aimed at evaluating the relative effectiveness of information campaigns, reminders, interaction through social networks and perception of political endorsement of the formalization program.

Intervention Date: February – September 2018

Research Design

Participants will be randomly assigned to one of six conditions. The experimental conditions all seek to increase formalization and tax compliance for microentrepreneurs. These arms combine high cost interventions (such as one to one consultancy) to lower cost treatments (such as cell phone reminders and WhatsApp groups). They also act on different mechanisms by providing information to support decision making as well as they tackle behavioral backlashes by means of reminders and social interaction).

The first arm delivers a consulting session about the MEI program and the offer to formalize the entrepreneur at the business location to a convenient date and time (common treatment arm). The second arm tests whether adding text messages sent weekly over a period of five months to remind the entrepreneur of the information provided about MEI program during the consulting session. The third arm tests whether adding participation in a whatsapp group (i.e. social media participation) in which an administrator sends messages using the information from the consulting session to stimulate social interaction about formalization increases formalization. The fourth and fifth arms combine consulting sessions (arm one) with the presentation of endorsements of the program by ex-president Lula (Brazilian Worker’s Party) or incumbent president Temer (Brazilian Democratic Movement Party), the first of which is expected to be much more popular and regarded as trustworthy by the study’s participants. Finally, the sixth arm is the control group.

Hypotheses

• H1: The provision of information (through one-to-one consulting session) combined with an offer to formalize the business on the spot increase formalization and compliance with business taxes. The mechanism is increased awareness of microentrepreneurs about the advantages of the MEI program.
• H2: Reminders (send through cell phone messages) magnify the effect of the provision of information on formalization and business tax compliance. The mechanism here is helping entrepreneurs overcome behavioral constraints such as limited attention.
• H3: Social media interactions with other entrepreneurs increase formalization and business tax compliance. The mechanisms work through increased awareness for the advantages of the MEI program (informational mechanism) and changing perceptions of what is approved or disapproved of by others (social norm mechanism).
• H4: Social media interactions with other entrepreneurs magnify the effect of one-on-one informational campaigns on formalization and business tax compliance. The mechanisms here is increased salience of social norms, which we expect to be shared during the interactions.
• H5: The credibility of the incumbent government promoting the program should affect formalization and business tax compliance. More specifically, associating of the program with a political figure who maintains a positive image among the target population should increase take-up, whereas the opposite should hold of a political figure with a negative image. (We expect Lula to be more popular than Temer among participants in our study, but we will have pre-treatment measures of their perceptions about either politician).
• H6: The impacts of all these variants of informational campaigns vary with personality traits of the microentrepreneur, her social skills and the role of the business within the household’s overall income generating strategies. In particular we expect subjects with higher levels of self-esteem, higher levels of social interaction and internal locus of control to respond more to all of the treatments.

Findings