# **1 Introduction**

Firms’ informality is pervasive in developing countries. Often firms are not registered with business registration or tax authorities. The 2010 census of 55,000 small and medium enterprises (SMEs) in 19 major district towns in Bangladesh suggests that about 70% of firms are informal, according to either their business or tax registration status. It is widely known that informality decreases with the size and performance of firms, which suggests that formality might cause better economic performance. Clearly this might not be the case; better performing firms might simply decide to be formal. This still leads to the question of why so many firms remain informal. A 14-country survey of informal firms by the World Bank suggests that the lack of information about the registration process and the time it takes to register a business are two leading causes for firms to operate informally. A 2008 International Finance Corporation (IFC) survey of SMEs in Bangladesh suggests that while the majority of the businesses believe that it is better to register their business with the registration authority, named the Registrar of Joint Stock Companies and Firms (RJSC), and operate formally, the cost to register a business, the corruption and the complicated registration processes keep many from becoming formal. In contrast to these survey findings, however, there is a growing body of evidence suggesting that although easier, less costly, and speedier registration procedures cause a modest increase in registration, direct incentives are more effective (McKenzie and Sakho, 2010; Bruhn, 2011; Kaplan, Piedra, and Seira, 2011; de Mel, McKenzie, and Woodruff, 2012). Building on a major business registration reform in Bangladesh that substantially reduces the time, complexity, and hidden costs of registering a business, our intervention aims to encourage SME registration through a targeted information campaign. The information campaign is meant to raise awareness of the potential benefits of registration and clarify the registration procedures implemented with the recent registration reforms.

There are clear legal benefits of registration, starting from name protection to easier access to legal authorities in case of controversies. In terms of potential economic benefits, one can imagine that registered firms have better access to markets, both financial and credit ones, can stipulate formal contracts and be better protected against fraudulent behavior of third parties. On the other hand, one needs to consider that associated with registration there are both direct and indirect costs. Direct costs are often small as in our current case post-reform, while indirect costs can be substantial due to the higher monitoring by the relevant institutions, including the tax authority, which would inevitably raise the (expected) tax burden on the registered firm. If such indirect costs are large compared to direct costs and potential benefits, a reduction in the direct costs of registration will have a negligible effect on actual registration. At the same time the potential economic benefits of formality might be small or too uncertain. One needs to consider that the low performing firms might disappear if registration were to be mandatory and severely enforced, however losing the left tail of the distribution of firms in terms of profitability might be a positive outcome in the longer term as the more productive, and larger firms, already