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Title:What determines firms' decisions to formalize? Evidence from rural Indonesia PDF Logo
Authors:McCulloch, Neil
Schulze, Günther G.
Voss, Janina
Issue Date:2010
Series/Report no.:Discussion Paper Series, University of Freiburg, Department of International Economic Policy 13
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.
Subjects:formalization
rural development
rural investment climate
informal sector
JEL:O17
O18
Document Type:Working Paper
Appears in Collections:iep Discussion Paper Series, Department of International Economic Policy, Universität Freiburg

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