Instituto de Economía

Abstract: What are the effects of eliminating registration costs and reducing taxes on firm creation and formalization? We answer this question by estimating the impacts of a large-scale formalization program in Brazil. We explore exogenous variation in access to the program across time, regions and industries using individual panel data. We show that reducing registration costs is not a sufficient condition to induce small informal entrepreneurs to formalize nor to foster the creation of new formal businesses. Our unique empirical setting also allows us to separately identify the impact of reducing taxes once registration costs had already been eliminated. We find modest effects on formalization and none on the  creation of new formal businesses.