of informality. Out of 517 firms in the full sample, 163 firms or 32 percent are formal according to this definition. As shown in Table 1, it is more common for firms to register locally: out of 517 firms in the full sample, 158 firms (31%) are registered locally while only 59 (11%) are registered at the central or national level. In terms of dual registration, out of these 59 firms that have registered centrally, 90 percent (53) have also registered locally, but out of the 158 firms that have registered locally, only 34 percent (53) registered also centrally.<sup>8</sup> While most of the paper focuses on this type of informality, section 3.4 briefly discusses the intensive margin of informality, namely informality of employment.

**Table 1: Distribution of firm (in)formality variables**

|||Registere<br>|d atregistr<br>|argeneral?<br>|
|---|---|---|---|---|
|||No|Yes|Total|
|Registered|No|353|6|359|
|locally?|Yes|105|53|158|
||Total|458|59|517|

Note: Unweighted data. The questions are: “Is your business registered with any local authority / municipality?” and “Is your business registered with the country revenue authority (or national registrar general)?”

# **_3.2 Formal versus informal firms and performance variables: Descriptive statistics_**

An initial question is whether most informal firms are associated with lower performance outcomes than formal firms. The main performance variables are labor productivity, sales, employment, and exporting. Labor productivity is measured as value added (total sales minus raw materials & intermediate inputs plus water & electricity used in production) divided by the total number of full-time working people including owners. The value of sales is asked in three complementary ways in the survey: total sales, turnover, and “revenues money received by the business.” Employment is the number of full-time employees plus the number of owners. Exporting is a non-continuous indicator variable taking the value of 0 or 1 depending on whether the firm reports having customers located in other countries or selling goods or services abroad; it is typically reported as a share of the total number of firms in a particular sub-sample.

The graphs in Figure 1 present conditional kernel densities (residuals of OLS regressions on urban and industry dummies) for formal and informal firms of the three main performance variables: log labor productivity, log sales, and log employment. The unconditional kernel densities of productivity and sales variables look similar. The densities of all three performance variables for formal firms are to the right of those for informal firms, although there are large areas of overlap. The second humps in the log productivity and log sales densities reflect the existence of a higher concentration of firms at relatively below FCFA 50 million are eligible to pay a unique global contribution or CGU, and thereby are exempt from separate VAT or sales taxes in Senegal. If formal firms that are required to pay local and municipal taxes do not pay them, this makes them nontax-compliant rather than informal. And while the keeping of formal accounts is often included in national definitions of formality, the relevant RIA survey question does not allow a direct correspondence with Senegal’s approach. The national statistical agency, ANSD, labels firms as informal if they do not have a formal accounting system according to the West African Accounting System or SYSCOA standards or an alternate formal harmonized accounting system.

> 8 Before deciding on this two-group classification of enterprises, we explored whether the category of “semi-formal” firms, namely firms that are either registered at the local or national level but not both, is sufficiently different from firms registered at both local and national levels, to warrant defining three separate groups. Since the kernel densities of both groups were almost identical, since they were both almost identically statistically significantly associated with performance variables relative to informal firms, and since their quantile regression coefficients along the entire productivity and sales distributions were almost identical relative to informal firms, they are considered part of the same “formal” category.

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