publication . Preprint . 2010

What Determines Firms’ Decisions to Formalize?

Neil McCulloch; Günther G. Schulze; Janina Voss;
Open Access
  • Published: 01 Nov 2010
In this paper we analyze the decision of small and micro firms to formalize, i.e. to obtain business and other licenses in rural Indonesia. We use the rural investment climate survey (RICS) that consists of non-farm rural enterprises, most of them microenterprises, and analyze the effect of formalization on tax payments, corruption, access to credit and revenue, taking into account the endogeneity of the formalization decision to such benefits and costs. We show, contrary to most of the literature, that formalization reduces tax and corruption payments. The benefits of formalization, and therefore the likelihood of being formal, also depend on characteristics su...
free text keywords: Formalization, rural development, rural investment climate, informal sector, jel:O17, jel:O18

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