Synthesis documents

Cape Town Conference: Is There Demand for Formality Among Informal Firms?: Evidence from Microfirms in Downtown Lima, 2009 (M. Jaramillo, Day 2, Fishbowl 2)

    In this paper, Miguel Jaramillo analyses the nature and extent of demand for formality (measured in terms of obtaining a licence) among microfirms in downtown Lima.

    Methods for info gathering
    The paper is based on the results of a panel/ tracer study, in which informal microfirms in the El Cercado area of Lima were surveyed. A random sample of firms was encouraged to formalise by subsidising the full money cost of doing so and by providing guidance through the process. The study draws upon cross-sectional data from the survey to identify possible factors associated with the potential demand for formality.

    Summary of results
    The author finds a paradoxical trend in the data: most firms report greater disadvantages than advantages of being informal, yet when encouraged to obtain a licence, only one out of four firms takes up the incentive. Thus, Jaramillo argues, for some firms formalisation may not be desirable, no matter how low the licence fee is. This is likely to be associated with:
    • The recurrent costs of being formal (e.g. resulting from inspections)
    • The low perceived value of the benefits of formalisation
    • The limited growth perspectives of the firms

    Associated Activities and Documents
    Impact Assessment
    »What is the Cost of Formality? Experimentally estimating the demand for formalization in Sri Lanka, de Mel, McKenzie and Woodruff, 2010
    Synthesis documents
    »Donor Committee Conference: Business Environment Reform and the Informal Economy, Cape Town, South Africa, 12-15 April 2010