1. WBGES 2010 11 Discussion prepared by Leora Klapper, Senior Economist, World Bank "What is the Cost of Formality? Experimentally Estimating the Demand for Formalization“ Suresh de Mel (University of Peradeniya), David McKenzie (World Bank) and Christopher Woodruff (University of Warwick)

2. WBGES 2010 2 Do Firms Transition From Informality? Less than 2% of firms in Latin America report in the Enterprise Survey that they started operations before registration Over 40% of firms in Cote d’Ivoire, Madagascar, and Mauritius are started not because the owner sees a good business opportunity, but because the (largest) owner could not find alternative employment opportunities (“unwilling” entrepreneurs) (World Bank, 2010) Registration information and elimination of fees is not enough to incentivize operating informal firms to register (de Mel, et al, 2010)

3. WBGES 2010 3 Where do firms register? Ratio of Nascent to formal Entrepreneurs

4. WBGES 2010 4 Why do firms register? CostsBenefits Registration fees Taxes Annual reporting Greater visibility Labor, Safety and other Regulations Less informal payments Govt. assistance VAT tax ID’s Formal (e.g. Govt.) contracts Bank financing (i.e. new investment) Formal labor contracts Courts, police protection, etc.

5. WBGES 2010 5 Who Benefits from Registration? Is the initial choice to register exogenous?

6. WBGES 2010 6 Wish list: Could taxation be explicitly reimbursed (or waived?) Could this study be replicated for a sample of individuals that report wanting to start a business (‘nascent’ entrepreurs)?