How should the government bring small firms into the formal system? Experimental evidence from Malawi

Abstract

Governments seek to reduce pervasive firm informality for multiple reasons: taxes, firm growth, rule of law, and information. We conducted a randomized experiment in Malawi to test three alternatives to achieving these goals: a) helping firms obtain a business registration certificate that offers formal market access but imposes no tax obligations; b) helping firms obtain both business and tax registration; and c) supplementing business registration with a bank information session. We find incredibly high demand for obtaining a formal status that is separate from tax obligations, and very low take-up of tax registration. Business registration alone has no impact on formal market access or firm performance. However, combining registration assistance with the bank information session increases firm sales by 20 percent and profits by 15 percent. The results highlight the advantages of separating business and tax registration, but also the need to help firms benefit from their new formal status.