Fiscal Contracts?: A Six-country Randomized Experiment on Transaction Costs, Public Services, and Taxation in Developing Countries

Abstract

We present results from six randomized controlled trials designed to promote formalization and tax payments in low and middle-income countries. Each randomized intervention used in-person visits, during which citizens received information about the government benefits that come with formalization and assistance undertaking one of three types of formalization (business registration, property regularization, and access to public services). A meta-analysis shows that the average effect of these interventions on citizens’ intent to formalize, formalization, and tax payment is indistinguishable from zero. Still, we find substantial heterogeneity across sites. A reduction in upfront transaction costs increases citizens’ intention to formalize when governments offer tangible individual benefits in exchange for formalization but not when benefits are diffuse or collective. Bureaucratic barriers thwarted willing citizens’ formalization efforts, and only a fraction of those who formalized ultimately paid more taxes. The results underscore the difficulty of regularizing taxation and service provision in low and middle-income countries.