SELF-CHOICE OF HOUSEHOLD FIRMS TO TRANSITION FROM INFORMALITY: EVIDENCE FROM SERVICE SECTOR MICRO UNITS

Abstract

This paper highlights the disaster costs which exist in the form of raids by authorities on informal service firms periodically. A disaster raid can cause irrefutable damage to household owners with monetary losses from loss of goods and eviction from the site location that makes it impossible for the owner to come back again. We develop a self-choice model where the owner is driven by his professionalism, asset holding, tax rates, and expected disaster costs. The owner’s choices include the option to remain unemployed, continue as owner or convert himself into a formal owner. Using the world banks’ micro enterprise survey data of over 1548 firms, we conduct tests of hypotheses. We find the owner’s self-drive and efficiency parameter to convert to formality is explained by his professional skill, and his and ownership status. We refute the significance of disaster costs which is outweighed by the owner’s professionalism.