Barriers to Formalization: Evidence from Six Randomized Experiments on Transaction Costs, Public Services, and Taxation in the Global South

Abstract

We present six harmonized RCTs to assess whether removing bureaucratic hurdles can encourage individuals to engage with the state formally in six countries in the Global South. Recent work has argued that the trade-offs inherent to formalization are more acceptable to individuals when formalization is tied to publicly-derived benefits, such as access to legal recourse in disputes, public services, or utilities. Yet, even in these cases, bureaucratic barriers to formalization might be insurmountable. So far, studies have focused on one type of bureaucratic procedure at a time. Hence, it is challenging to adjudicate if individuals remain informal because they cannot or will not engage with the state. Our interventions involved in-person assistance to reduce upfront transaction costs of dealing with the bureaucracy in three types of policy domains: untitled property, unregistered small businesses, and informal access to utilities (i.e., buying water from informal vendors) and services (disposing of garbage through informal channels). A meta-analysis shows that the average effect of these interventions on individuals’ formalization, tax payment, and access to services is indistinguishable from zero. We also find substantial heterogeneity in individuals’ intent to undertake and complete the bureaucratic process. Across policy domains, individuals are more willing to bear formalization’s downstream costs when the benefits are individual, and no superior alternative exists. Our results also suggest that local bureaucratic incentives must be aligned for demand-side interventions to work.