Shedding light on the shadows of informality: A meta-analysis of formalization interventions targeted at informal firms

• Published in: Labour economics 2020-12, Vol.67, p.101925, Article 101925
• Main Authors: Floridi, Andrea, Demena, Binyam Afewerk, Wagner, Natascha
• Format: Article
• Language: English
• Subjects: Developing countries; Formalization; Informal enterprises; Meta-regression analysis
• ISSN: 0927-5371; 1879-1034
• DOI: 10.1016/j.labeco.2020.101925

•The meta-analysis studies the impact of formalization policies on firm formalization.•We analyse 842 estimates from 27 studies by 49 researchers published until June 2019.•We find no evidence for more formal firms due to the studied interventions.•There is some indication that policies increasing the benefits might work best.•Further piloting and experimenting is needed to achieve large-scale formalization. Governments and policymakers promote formalization through various interventions ranging from simplifying registration procedures to increasing law enforcement. Despite these efforts, not much is known about the effects of interventions aiming at formalizing informal firms. This meta-analysis examines the empirical literature on the impact of such formalization interventions. We systematically assessed the literature on the impact of formalization policies resulting in 842 estimates from 27 studies conducted by 49 researchers and published until June 2019. We analysed the meta-impact of (i) cost, (ii) benefit and (iii) enforcement policy interventions and verified whether the resulting outcomes are influenced by the type of data, econometric approach and specification, country characteristics, as well as publication bias. Overall, we find no evidence for increased formalization associated with the so far implemented interventions. There is some indication that policies increasing the benefits after formalization are associated with increased formalization rates but the evidence base is thin suggesting that further piloting and experimenting is needed to achieve large-scale formalization of the informal economy.