treatment groups were provided the same information and also offered a payment of 10,000 Sri Lankan Rupees (LKR), 20,000 LKR and 40,000 LKR (approximately US$88, $175 and $350 respectively) to register.

We find that providing information and reimbursing the cost of registration does not induce firms to register. In contrast, 17-22 percent of eligible firms register when offered 10,000 or 20,000 LKR, just under half a month’s and one month’s profits for the median firm respectively, and 48 percent register when offered 40,000 LKR. Few of those who did not register when offered 40,000 LKR registered when given additional time or when offered 80,000 LKR. The experiment sheds light not only on the demand for informality, but also on the nature of barriers to formal registration. An important share of the firms not registering after receiving the largest incentive report that issues related to land tenancy prevented them from doing so. These firms operated with informal leases or agreements—ironically, often on government-owned land—and hence were unable to provide authorities with the required proof of ownership of the land on which the firm operated.

Three follow-up surveys of these same firms were conducted at 15, 22 and 31 months after the intervention, enabling us to examine whether and how the firms benefited from formalization. Firms which formalized are found to have higher profits, although this impact seems largely due to the experiences of a few firms experiencing substantial growth, with the distribution of profits almost identical for treatment and control firms over most of the distribution. Examining the channels through which formalization might benefit firms, we find increased advertising and use of receipt books, but no increases in receipt of government contracts, use of bank accounts or loans, or participation in government programs. Consistent with the effect of formal land titling reported in Di Tella et al (2007), we also find impacts in terms of attitudes: firms that formalize are more likely to trust local government and agree that paying taxes is a civic duty, but are also more likely to agree that small businesses are taxed too much.

This study is the first to experimentally induce informal firms to register for tax purposes.<sup>1</sup> It builds on an existing literature which has largely focused on the impacts of entry regulations at both the macro and micro levels, and on new firm creation, rather than formalization of existing informal firms. At a cross country level, countries with more burdensome entry regulations have larger informal sectors (Djankov et al, 2002) and costly entry regulations are also associated with the creation of fewer limited

> 1 An unpublished study that took place over a similar time frame to our experiment by Alcázar et al. (2010) in Lima, Peru also tries to formalize firms through subsidizing the costs of registration, although they focus on municipal level registration. Whilst their study has very high attrition levels (over half their sample attrits), the preliminary results we have seen suggest the results of our study may generalize to other contexts. We discuss this study in more detail in Section 6.

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