Targeted High-Productivity Firm Formalization
RCTReview
Universal formalization incentives waste government subsidies on low-productivity micro-firms that cannot generate enough revenue to remain formal long-term.
Picture this
Think of distributing high-performance racing fuel. Giving it to tiny push-scooters won't make them fast enough to join a highway, wasting expensive fuel. Allocating the fuel specifically to sports cars that are already capable of highway speeds ensures they reach top performance efficiently.
What the evidence says
The average positive formalization effect of incentive programs in Brazil was driven 100% by high-income entrepreneurs, as small low-productivity firms derived negligible benefit from formalizing.
- Who was studied
- Informal business owners in Benin (Benhassine et al., 2018) and micro-entrepreneurs across Brazil (Rocha et al., 2018).
- How
- Randomized Controlled Trial (RCT) and econometric firm-level impact evaluation.
What to do
Restrict high-value formalization subsidies and business development grants to informal firms meeting baseline revenue, worker headcount, or banking asset thresholds.
From the source
"In Brazil, researchers have shown that the average effect of a formalization incentive program was driven entirely by high-income entrepreneurs (Rocha et al., 2018). The authors argue that this result is consistent with the view that smaller, low-productivity firms benefit little from formalizing."
JOI_Brazil_Evidence_in_Labor_Market_Policies_and_Implications_for.pdf