The Demand for, and Consequences of, Formalization Among Informal Firms in Sri Lanka

Suresh de Mel
David McKenzie
Robert M. Townsend
Publication Type: 
Working Papers
Journal Name: 
NBER Working Paper No. 18019
Publication Year: 


We conduct a field experiment in Sri Lanka providing informal firms incentives to formalize. Information about the registration process and reimbursement of direct costs has no effect. Payments equivalent to one-half to one month (alternatively, 2 months) of the median firm’s profits leads to registration of around one-fifth (alternatively, one-half) of firms. Land ownership issues are the most common reason for not registering. Follow-up surveys 15 to 31 months later show higher mean profits, but largely in a few firms which grew rapidly. We find little evidence for other changes in behavior, but formalized firms express more trust in the state.

South and Central Asia
Sri Lanka
Informal Economy