the share of firms that export, formal firms with young women owners lag behind formal firms owned by young or older men. These findings are likely a reflection of biases preventing them to take advantage of the opportunities offered to men-owned firms. Policies that would enable them to better leverage their assets, supported by equal access to the range of performance-enhancing DTs that allow them to learn as they work, to financing, and to markets for the purchase of required inputs and for the sale of outputs, are important to enhance overall productivity, sales, exporting and jobs outcomes.

# **2. Literature review and conceptual framework**

Informality and associated lower productivity levels on average are assumed to result both from the selection choices of firm owners and due to the inherent constraints of being informal. In a recent analytical framework developed by Ulyssea (2018), firms with sufficiently low productivity are presumed to self-select into informality when the net benefits of informality outweigh the net benefits of formality. It is assumed that firms face a number of costs and benefits associated with informality and formality. Firms are assumed to choose to legally register or not based on undertaking a cost-benefit analysis. Examples of costs of formality given in the literature include costs of entry (e.g., costs of registration), plus tax, regulatory and harassment/corruption burdens associated with formality. Some of these costs could be due to purely wasteful or rent-seeking regulations (e.g., licensing costs that are maintained to preserve privileges of existing formal enterprises in industries or professions) and some may be useful from a social welfare point of view (e.g., reasonable phytosanitary or environmental regulations). As benefits of formality, the literature has emphasized, among others, the ability to access financial markets (i.e., the ability to get loans) and to access government support programs to improve productivity. Costs of informality often include expected costs of getting caught including associated fines (which would increase as enforcement increases) and the opportunity costs of not having access to the modern economy, including access to financial markets. The benefits of informality likely include increased flexibility (e.g., easier responsiveness to changing market circumstances, a greater ability to change product lines, etc.) as well as the ability to avoid tax, regulatory and harassment burdens.

Based on such a model, Ulyssea proposes three types of informal firms, based on complementary views for understanding informality. Those that correspond to the “De Soto view” (or “held-back entrepreneurs”), namely enterprises that would switch to formality if entry costs were reduced to zero. The net present value (NPV) of these firms is higher remaining informal than becoming formal but the difference is less than entry or registration costs. Relative to other informal firms, these firms have higher productivity. They are kept out of formality solely due to high regulatory costs. To the extent that these entry costs are due to non-welfare-improving regulations and associated onerous licensing procedures and red tape, eliminating them would be clearly desirable. Recent empirical evidence suggests that these costs are either lower than economists used to believe, and/or that their reduction does not really create big changes in incentives to register. Based on an estimated structural model and matched employeremployee data on formal and informal firms in Brazil, Ulyssea infers that these firms make up 9 percent of firms. The second group (the “parasitic view”, 42 percent of firms) refer to those that would remain informal even if entry costs were reduced to zero. These are enterprises that would still have positive NPV if they somehow switched to formality, but the NPV of informality is higher. They are productive enough to survive in the formal sector but choose to remain informal to earn higher profits. Their productivity lies in a range below those of held-back entrepreneurs but higher than that of the third group, namely 6