reimbursement for the modest direct costs do not result in any increase in registration. Instead, registration is spurred only when the information is combined with incentive payments.

The incentive required to induce registration is modest compared to reported profits levels of the sample enterprises. A payment of two month’s profit is sufficient to induce half of the firms to register. Among those not registering after receiving an offer of this magnitude, more than half took some steps toward registering. They stopped only when learning that issues of land ownership would prevent them from registering without paying significant fees to landlords, temples, or the government. Thus, in the absence of land issues, the net costs of formality appear to be modest for almost all of the informal firms represented by our sample. However, the net benefit also appears modest for most firms. While we do find an increase in profits after formalization, this mean treatment effect seems to be driven by a successful upper tail. Firms that formalize do more advertising and are more likely to use receipt books, but don’t appear to get the more touted benefits of formalizing such as increased access to credit, obtaining government contracts, or participating in government programs. Most firms seem therefore to be rationally refraining from formalizing, while a few seem to be suboptimally informal.

This finding is important for two reasons. First, while governments clearly should not mimic our experiment with a policy of direct payments, the results do suggest that modest increases in the perceived benefits of being formal could be expected to dramatically increase the demand to formalize among firms currently operating informally. Second, despite the pervasive interest of governments around the world in trying to increase the size of their formal sector, our results overall suggest little in the way of pent-up demand to become formal among existing firms. Nevertheless, our results do show an increase in trust in the government as a result of formalizing. It is possible that formalizing a large number of firms would offer broader benefits to society in terms of trust.

Finally, it should be noted that our study measures the benefits of formalizing for firms that are already in business. There may well be benefits from the simplification of registration at the extensive margin, if high-ability entrepreneurs not currently operating a business are induced to enter. Measuring such impact remains a key area for future research.

# **References**

> Alcázar, Lorena, Raúl Andrade, and Miguel Jaramillo, 2010. ―Panel/tracer study on the impact of business facilitation processes on enterprises and identification of priorities for future business enabling environment projects in Lima, Peru – Report 5: impact evaluation after the third round‖, Report to the International Finance Corporation, Mimeo.

> Bertrand, Marianne and Francis Kramarz, 2002, "Does Entry Regulation Hinder Job Creation? Evidence From The French Retail Industry," _The Quarterly Journal of Economics_ , vol. 117(4), pp. 1369-1413.

> Bruhn, Miriam. 2011. ―License to sell: the effect of business registration reform on entrepreneurial activity in Mexico.‖ _Review of Economics and Statistics,_ 93(1): 382-86.

22