What Determines Firms’ Decisions to Formalize?

Neil McCulloch (), Günther Schulze and Janina Voss ()
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Janina Voss: Department of International Economic Policy, University of Freiburg

No 13, Discussion Paper Series from Department of International Economic Policy, University of Freiburg

Abstract: In this paper we analyze the decision of small and micro firms to formalize, i.e. to obtain business and other licenses in rural Indonesia. We use the rural investment climate survey (RICS) that consists of non-farm rural enterprises, most of them microenterprises, and analyze the effect of formalization on tax payments, corruption, access to credit and revenue, taking into account the endogeneity of the formalization decision to such benefits and costs. We show, contrary to most of the literature, that formalization reduces tax and corruption payments. The benefits of formalization, and therefore the likelihood of being formal, also depend on characteristics such as firm size, as well as the education and ethnicity of the owner.

Keywords: Formalization; rural development; rural investment climate; informal sector (search for similar items in EconPapers)
JEL-codes: O17 O18 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2010-11, Revised 2010-11
New Economics Papers: this item is included in nep-dev and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fre:wpaper:13

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