The Impact of Formality on Microenterprise Performance: Evidence from Downtown Lima

Abstract: This paper summarizes results from a panel/tracer study that empirically measures the impact that operating with municipal license has on different outcome variables related to the performance of micro firms in downtown Lima. The baseline (first round) is composed of firms operating without license. The second, third and fourth follow-up surveys were implemented six, 18, and 30 months after the baseline survey, respectively. Between the baseline and the first follow-up survey an encouragement approach, by which a random sub-sample of firms from the baseline were offered a monetary incentive to get the license, was implemented. This experiment generates exogenous variability in the final assignment of firms operating with license and without license. Two different estimators were implemented: a difference in difference estimator and an instrumental variables estimator (using as instrument for the operating license the incentive offer). Results show that operating with a municipal license has no statistically significant effect on a range of firms´ performance indicators. Neither output variables such as sales, sales per worker, profits, profits per worker, nor intermediate outcome variables, such as number of employees, access to credit, investment in infrastructure and machinery (inputs) are statistically affected by the firm operating with a municipal license. For two variables (profits per worker and number of workers) we obtain significant coefficients, but these are not robust to alternative methods. Keywords: informality, firm behavior, instrumental variables. JEL codes: O17, O12, D21, L25