An obvious question is then whether these large profits in the upper tail represent genuine changes or whether they represent measurement error and/or idiosyncratic shocks for a few firms. To address this issue, in June 2011 we conducted open-ended discussions with a set of firms experiencing large increases in profits after registering. We wanted to see whether they had taken specific actions following registration and whether they appeared to benefit from doing so. Although small in number, these more detailed case studies provide support for the idea that a few firms had benefited substantially from formalizing. For example, two of the firms were in the vehicle repair business—one automobiles and one autorickshaws. Both said that an important consequence of registration was the ability to become an official parts distributors for an auto parts manufacturer. Previously, they had purchased parts from another dealer, i.e., at higher than the wholesale price. Both had also undertaken expansions of the physical facilities, with one adding an auto lift and a customer waiting room, while increasing employment from 2 to 8 workers. A saw mill which registered said the key was to be able to put the forest service stamp on the receipts which he issued. The stamp allows customers to transport the wood across municipal boundaries without obtaining further permissions. His estimate was that he had previously lost 25 percent of sales to other mills which could provide this stamp. Finally, a grocery store and tea (snack) shop had used the license to obtain a loan to purchase a delivery truck. The truck was used in the business, but also leased out. On his own, he had gone to the health department to request a health inspection for his tea shop. He was intent on improving his score so that he would obtain a health sticker he could display, and so that he could open a bakery and wholesale bread. A final case was of a fish market vendor, who had used the 40,000 LKR grant to buy a freezer which he could then use to increase and maintain his stock, and then increased advertising and used his registration to print a receipt book he could use to give receipts to restaurants who wanted fish. In all these cases, there were clear changes in the business operation, and in the attitude and vision of the owners. Hence, we believe this growth at the top tail of the distribution is genuine. But such firms were rare. Most firms that had formalized had not seen such improvements.

# **5.4 Impact on Mediating Channels**

The above analysis suggests that formalization has not had significant impacts on key outcomes for most firms that formalized, but that it has helped a handful of firms which grew substantially. Our follow-up surveys span a period of 15 to 31 months after treatment. This should be a sufficient period to detect effects for most firms. Nevertheless, one concern is that the standard errors in Table 5a are relatively large, reflecting relatively low power to detect effects. The CDF in Figure 3 is comforting in this regard, as it shows strikingly similar distributions of profits for treatment and control for most of the distribution. However, a further approach to determining whether formalization seems to be benefitting 18