Small Firms’ Formalization : The Stick Treatment

Firm informality is pervasive throughout the developing world, Bangladesh being no exception. The informal status of many firms substantially reduces the tax basis and therefore impacts the provision of public goods. The literature on encouraging f...

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Main Authors:	De Giorgi, Giacomo, Ploenzke, Matthew, Rahman, Aminur
Format:	Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2015
Subjects:	MONEY LENDERS HOME OWNERSHIP LETTER OF CREDIT ACCOUNTING CERTIFICATE SALES INTEREST EXCHANGE BUSINESS TRANSACTIONS PAYMENT SYSTEM INFORMATION DOMESTIC MARKET DEVELOPING COUNTRIES POLITICAL ECONOMY REVENUES MARKET SIZE INFORMATION SHARING LOAN TRADE SECTOR TAX INCOME TAX BUSINESS ASSOCIATIONS CREDIT CARD ACCESS TO MARKET RESERVE INTERNATIONAL BANK PROGRESSIVE TAXES DEVELOPING COUNTRY LENDER CREDIBILITY OPEN ACCESS TERMS OF CREDIT TELEPHONE CONNECTION INSTITUTIONS LINK DATA ENFORCEMENT MECHANISMS COMMERCE COSTS COMMERCIAL BANK RESERVE BANK ELECTRONIC PAYMENT SYSTEM BANKING INSTITUTIONS CONTRACTS TAX REGIME LICENSE REGISTRATION FEE INTEREST RATES MARKETS RETURN TAX BASE LENDERS LOANS PRODUCT TAX REVENUES BUSINESS ENTRY CASH TRANSFERS MONEY LENDER BANK POLICY TELEPHONE TAXES IDENTIFICATION NUMBER TRANSACTIONS MANUFACTURING MICRO‐CREDIT PHONE MICRO-CREDIT TRANSACTION FEDERAL RESERVE GOOD INSPECTION FEDERAL RESERVE BANK TIME FRAME RESULTS FUTURE CREDIT ACCESS VALUE GPS COMPETITIVENESS CONTRACTUAL RELATIONSHIPS FIXED CAPITAL DEMAND CONTRACT TAX BASIS ACCOUNTANT OPPORTUNITY COSTS DEFAULT MARKET MARKET VALUE TOTAL SALES TREASURY INSURANCE RESULT TAXATION TRADE TAX LAW GOODS LICENSES REGISTRATION SYSTEM DURABLE BUSINESSES BUSINESS SHARE ELECTRONIC PAYMENT ONLINE REGISTRATION TAX SYSTEM PERFORMANCE SUPPLY TAX IDENTIFICATION NUMBER MARKET PLACES ECONOMIC ACTIVITIES REVENUE CHECK CHAMBER OF COMMERCE SHAREHOLDER UNFAIR COMPETITION TAX RETURN EXCHANGE RATE TAX COLLECTORS SUPPLIERS DATABASE PROFITS TARGET SMALL BUSINESSES MARKET LEVEL REGISTRATION PROCESS
Online Access:	http://documents.worldbank.org/curated/en/2015/06/24679230/small-firms’-formalization-stick-treatment http://hdl.handle.net/10986/22204

id	okr-10986-22204
recordtype	oai_dc
spelling	okr-10986-222042021-04-23T14:04:07Z Small Firms’ Formalization : The Stick Treatment De Giorgi, Giacomo Ploenzke, Matthew Rahman, Aminur MONEY LENDERS HOME OWNERSHIP LETTER OF CREDIT ACCOUNTING CERTIFICATE SALES INTEREST EXCHANGE BUSINESS TRANSACTIONS PAYMENT SYSTEM INFORMATION DOMESTIC MARKET DEVELOPING COUNTRIES POLITICAL ECONOMY REVENUES MARKET SIZE INFORMATION SHARING LOAN TRADE SECTOR TAX INCOME TAX BUSINESS ASSOCIATIONS CREDIT CARD ACCESS TO MARKET RESERVE INTERNATIONAL BANK PROGRESSIVE TAXES DEVELOPING COUNTRY LENDER CREDIBILITY OPEN ACCESS TERMS OF CREDIT TELEPHONE CONNECTION INSTITUTIONS LINK DATA ENFORCEMENT MECHANISMS COMMERCE COSTS COMMERCIAL BANK RESERVE BANK ELECTRONIC PAYMENT SYSTEM BANKING INSTITUTIONS CONTRACTS TAX REGIME LICENSE REGISTRATION FEE INTEREST RATES MARKETS RETURN TAX BASE LENDERS LOANS PRODUCT TAX REVENUES BUSINESS ENTRY CASH TRANSFERS MONEY LENDER BANK POLICY TELEPHONE TAXES IDENTIFICATION NUMBER TRANSACTIONS MANUFACTURING MICRO‐CREDIT PHONE MICRO-CREDIT TRANSACTION FEDERAL RESERVE GOOD INSPECTION FEDERAL RESERVE BANK TIME FRAME RESULTS FUTURE CREDIT ACCESS VALUE GPS COMPETITIVENESS CONTRACTUAL RELATIONSHIPS FIXED CAPITAL DEMAND CONTRACT TAX BASIS ACCOUNTANT OPPORTUNITY COSTS DEFAULT MARKET MARKET VALUE TOTAL SALES TREASURY INSURANCE RESULT TAXATION TRADE TAX LAW GOODS LICENSES REGISTRATION SYSTEM DURABLE BUSINESSES BUSINESS SHARE ELECTRONIC PAYMENT ONLINE REGISTRATION TAX SYSTEM PERFORMANCE SUPPLY TAX IDENTIFICATION NUMBER MARKET PLACES ECONOMIC ACTIVITIES REVENUE CHECK CHAMBER OF COMMERCE SHAREHOLDER UNFAIR COMPETITION TAX RETURN EXCHANGE RATE TAX COLLECTORS SUPPLIERS DATABASE PROFITS TARGET SMALL BUSINESSES MARKET LEVEL REGISTRATION PROCESS Firm informality is pervasive throughout the developing world, Bangladesh being no exception. The informal status of many firms substantially reduces the tax basis and therefore impacts the provision of public goods. The literature on encouraging formalization has predominantly focused on reducing the direct costs of formalization and has found negligible impacts of such policies. This paper focuses on a stick intervention, which to the best of the knowledge of the authors is the first one in a developing country setting that deals with the most direct and dominant form of informality, i.e. registration with the tax authority with a direct link to the countrys potential revenue base and thus public goods provision. The paper implements an experiment in which firms are visited by tax representatives who deliver an official letter from the Bangladesh National Tax Authority stating that the firm is not registered and the consequential punishment if the firm fails to register. The paper finds that the intervention increases the rate of registration among treated firms, while firms located in the same market but not treated do not seem to respond significantly. The paper also finds that only larger revenue firms at baseline respond to the threat and register. These findings have at least two important policy implications: i. the enforcement angle, which could be an important tool to encourage formalization; and ii. targeting of government resources for formalization to the high-end informal firms. The effects are generally small in levels and this leaves open the question of why many firms still do not register. 2015-07-17T16:48:29Z 2015-07-17T16:48:29Z 2015-06 Working Paper http://documents.worldbank.org/curated/en/2015/06/24679230/small-firms’-formalization-stick-treatment http://hdl.handle.net/10986/22204 English en_US Policy Research Working Paper;No. 7318 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper South Asia Bangladesh
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English en_US
topic	MONEY LENDERS HOME OWNERSHIP LETTER OF CREDIT ACCOUNTING CERTIFICATE SALES INTEREST EXCHANGE BUSINESS TRANSACTIONS PAYMENT SYSTEM INFORMATION DOMESTIC MARKET DEVELOPING COUNTRIES POLITICAL ECONOMY REVENUES MARKET SIZE INFORMATION SHARING LOAN TRADE SECTOR TAX INCOME TAX BUSINESS ASSOCIATIONS CREDIT CARD ACCESS TO MARKET RESERVE INTERNATIONAL BANK PROGRESSIVE TAXES DEVELOPING COUNTRY LENDER CREDIBILITY OPEN ACCESS TERMS OF CREDIT TELEPHONE CONNECTION INSTITUTIONS LINK DATA ENFORCEMENT MECHANISMS COMMERCE COSTS COMMERCIAL BANK RESERVE BANK ELECTRONIC PAYMENT SYSTEM BANKING INSTITUTIONS CONTRACTS TAX REGIME LICENSE REGISTRATION FEE INTEREST RATES MARKETS RETURN TAX BASE LENDERS LOANS PRODUCT TAX REVENUES BUSINESS ENTRY CASH TRANSFERS MONEY LENDER BANK POLICY TELEPHONE TAXES IDENTIFICATION NUMBER TRANSACTIONS MANUFACTURING MICRO‐CREDIT PHONE MICRO-CREDIT TRANSACTION FEDERAL RESERVE GOOD INSPECTION FEDERAL RESERVE BANK TIME FRAME RESULTS FUTURE CREDIT ACCESS VALUE GPS COMPETITIVENESS CONTRACTUAL RELATIONSHIPS FIXED CAPITAL DEMAND CONTRACT TAX BASIS ACCOUNTANT OPPORTUNITY COSTS DEFAULT MARKET MARKET VALUE TOTAL SALES TREASURY INSURANCE RESULT TAXATION TRADE TAX LAW GOODS LICENSES REGISTRATION SYSTEM DURABLE BUSINESSES BUSINESS SHARE ELECTRONIC PAYMENT ONLINE REGISTRATION TAX SYSTEM PERFORMANCE SUPPLY TAX IDENTIFICATION NUMBER MARKET PLACES ECONOMIC ACTIVITIES REVENUE CHECK CHAMBER OF COMMERCE SHAREHOLDER UNFAIR COMPETITION TAX RETURN EXCHANGE RATE TAX COLLECTORS SUPPLIERS DATABASE PROFITS TARGET SMALL BUSINESSES MARKET LEVEL REGISTRATION PROCESS
spellingShingle	MONEY LENDERS HOME OWNERSHIP LETTER OF CREDIT ACCOUNTING CERTIFICATE SALES INTEREST EXCHANGE BUSINESS TRANSACTIONS PAYMENT SYSTEM INFORMATION DOMESTIC MARKET DEVELOPING COUNTRIES POLITICAL ECONOMY REVENUES MARKET SIZE INFORMATION SHARING LOAN TRADE SECTOR TAX INCOME TAX BUSINESS ASSOCIATIONS CREDIT CARD ACCESS TO MARKET RESERVE INTERNATIONAL BANK PROGRESSIVE TAXES DEVELOPING COUNTRY LENDER CREDIBILITY OPEN ACCESS TERMS OF CREDIT TELEPHONE CONNECTION INSTITUTIONS LINK DATA ENFORCEMENT MECHANISMS COMMERCE COSTS COMMERCIAL BANK RESERVE BANK ELECTRONIC PAYMENT SYSTEM BANKING INSTITUTIONS CONTRACTS TAX REGIME LICENSE REGISTRATION FEE INTEREST RATES MARKETS RETURN TAX BASE LENDERS LOANS PRODUCT TAX REVENUES BUSINESS ENTRY CASH TRANSFERS MONEY LENDER BANK POLICY TELEPHONE TAXES IDENTIFICATION NUMBER TRANSACTIONS MANUFACTURING MICRO‐CREDIT PHONE MICRO-CREDIT TRANSACTION FEDERAL RESERVE GOOD INSPECTION FEDERAL RESERVE BANK TIME FRAME RESULTS FUTURE CREDIT ACCESS VALUE GPS COMPETITIVENESS CONTRACTUAL RELATIONSHIPS FIXED CAPITAL DEMAND CONTRACT TAX BASIS ACCOUNTANT OPPORTUNITY COSTS DEFAULT MARKET MARKET VALUE TOTAL SALES TREASURY INSURANCE RESULT TAXATION TRADE TAX LAW GOODS LICENSES REGISTRATION SYSTEM DURABLE BUSINESSES BUSINESS SHARE ELECTRONIC PAYMENT ONLINE REGISTRATION TAX SYSTEM PERFORMANCE SUPPLY TAX IDENTIFICATION NUMBER MARKET PLACES ECONOMIC ACTIVITIES REVENUE CHECK CHAMBER OF COMMERCE SHAREHOLDER UNFAIR COMPETITION TAX RETURN EXCHANGE RATE TAX COLLECTORS SUPPLIERS DATABASE PROFITS TARGET SMALL BUSINESSES MARKET LEVEL REGISTRATION PROCESS De Giorgi, Giacomo Ploenzke, Matthew Rahman, Aminur Small Firms’ Formalization : The Stick Treatment
geographic_facet	South Asia Bangladesh
relation	Policy Research Working Paper;No. 7318
description	Firm informality is pervasive throughout the developing world, Bangladesh being no exception. The informal status of many firms substantially reduces the tax basis and therefore impacts the provision of public goods. The literature on encouraging formalization has predominantly focused on reducing the direct costs of formalization and has found negligible impacts of such policies. This paper focuses on a stick intervention, which to the best of the knowledge of the authors is the first one in a developing country setting that deals with the most direct and dominant form of informality, i.e. registration with the tax authority with a direct link to the countrys potential revenue base and thus public goods provision. The paper implements an experiment in which firms are visited by tax representatives who deliver an official letter from the Bangladesh National Tax Authority stating that the firm is not registered and the consequential punishment if the firm fails to register. The paper finds that the intervention increases the rate of registration among treated firms, while firms located in the same market but not treated do not seem to respond significantly. The paper also finds that only larger revenue firms at baseline respond to the threat and register. These findings have at least two important policy implications: i. the enforcement angle, which could be an important tool to encourage formalization; and ii. targeting of government resources for formalization to the high-end informal firms. The effects are generally small in levels and this leaves open the question of why many firms still do not register.
format	Working Paper
author	De Giorgi, Giacomo Ploenzke, Matthew Rahman, Aminur
author_facet	De Giorgi, Giacomo Ploenzke, Matthew Rahman, Aminur
author_sort	De Giorgi, Giacomo
title	Small Firms’ Formalization : The Stick Treatment
title_short	Small Firms’ Formalization : The Stick Treatment
title_full	Small Firms’ Formalization : The Stick Treatment
title_fullStr	Small Firms’ Formalization : The Stick Treatment
title_full_unstemmed	Small Firms’ Formalization : The Stick Treatment
title_sort	small firms’ formalization : the stick treatment
publisher	World Bank, Washington, DC
publishDate	2015
url	http://documents.worldbank.org/curated/en/2015/06/24679230/small-firms’-formalization-stick-treatment http://hdl.handle.net/10986/22204
_version_	1764450420311195648

Small Firms’ Formalization : The Stick Treatment

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