columns 12 and 13, becomes insignificant when other covariates are added. Column 3 adds a dummy for owners who are “transformational”. This variable has a positive coefficient that is significant at the 1 percent level and remains significant in most of the specifications presented in the table. Columns 4 and 5 include variables that capture the quality of the human capital of the owner. Column 4 includes a variable that captures whether the owner has a certificate of vocational training. Its coefficient is positive but significant only at the 10 percent level and loses significance when additional covariates are added to the specification. Column 5 includes the number of years of schooling of the owner and its coefficient is not statistically significant. Column 6 adds variables capturing access to finance, namely having a loan and having a credit line from a supplier. They are not statistically significant.<sup>18</sup> Columns 7-10 test whether having sophisticated buyers is associated with a higher probability of being formal. Having big enterprises or non-local buyers as customers, individually or together, are not positively associated with the probability of being formal (columns 7, 8, 9 and 10). Columns 11 and 12 test the possibility that having sophisticated suppliers may be associated with formality. Column 11 shows that having large formal enterprises as suppliers is significantly positively associated with formality. This could reflect the fact large formal suppliers prefer dealing with formal enterprises or it could reflect the fact that small firms jump a quality hurdle and are more willing to become formal when they deal with large formal enterprises as suppliers. The coefficient of this variable remains significant when used together with variables representing sophisticated buyers (column 12). Column 13 tests whether size is an important corelate of formality and it turns out that it is: relative to firms with zero full time employees, having a positive number of full-time employees is associated with 30 to 37 percentage points higher probability of being formal. Possibly because or multicollinearity, adding size to the regression equation modifies some of the coefficients in other variables as well: in particular, urban becomes positive and significant and having suppliers located abroad becomes negative and significant but only at the 10 percent level. Finally, column 14 reports our preferred specification, where most of the variables with insignificant coefficients are excluded from the equation.

The summary of the analysis is that having higher productivity, having more full-time employees, having a young woman owner, having electricity, being in an urban location, having a transformational owner, and having large formal firms as suppliers are positively associated with formality. The strong positive association between formality and productivity is aligned with the findings from the exploratory propensity score weighting investigation that low productivity is not a result of informality itself, and that informality does not cause low productivity and does not necessarily constrain firms to remain at very low productivity levels. Both findings support the view that policy should strive to improve the productivity of those informal firms willing and able to do so, as this should also lead informal firms to choose formality over time as they grow in productivity, sales, jobs and earnings and as the benefits to them of becoming formal become more valuable.

> 18 When the equation is run only with having a loan, the coefficient is not significant. When the equation is run only with having a credit line from a supplier, the coefficient of this variable is significant only at the 10 percent level. The coefficients remain insignificant when the covariate set excludes having electricity or being transformational.

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