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On the Effect of the Costs of Operating Formally
Last registered on May 27, 2015

Pre-Trial

Trial Information
General Information
Title
On the Effect of the Costs of Operating Formally
RCT ID
AEARCTR-0000725
Initial registration date
May 27, 2015
Last updated
May 27, 2015 5:36 PM EDT
Location(s)
Region
Primary Investigator
Affiliation
University of Maryland
Other Primary Investigator(s)
PI Affiliation
ECON ESTUDIO
Additional Trial Information
Status
Completed
Start date
2010-01-01
End date
2015-05-27
Secondary IDs
Abstract
This paper analyzes the impact of the elimination of the initial fixed costs of registration on the decision of informal firms to operate formally in Bogotá, Colombia. The Chamber of Commerce of Bogotá (CCB) conducts workshops for prospective formal-sector entrants and arranges personalized meetings for them with CCB agents. The CCB’s decision to significantly reduce the transaction costs of registration and the entry into force of Act No. 1429 of 2010, which eliminated the costs of the initial procedure for registering as a formal enterprise and provided exemptions from relevant taxes during the first years after formalization, provided us with an ideal experiment for studying how the elimination of the initial fixed costs of formalization would influence firms’ decision to operate formally or not. We obtained two important results. First, while a workshop treatment had no effect on firms’ formalization decisions, meetings at the firm with CCB agents raised the likelihood that a business would begin to operate formally by 5.5 percentage points for all the firms that were invited, at random, to participate in this arm of the intervention and by 32 percentage points for the firms that accepted the invitation. Second, the effect on the treatment firms did not persist over time. After a year of formal operation, it disappeared. These results indicate that substantial reductions in the fixed costs of operating formally are not effective in formalization choices, since such reductions had no lasting effect on formalization decisions.
External Link(s)
Registration Citation
Citation
Galiani, Sebastian and Marcela Melendez. 2015. "On the Effect of the Costs of Operating Formally." AEA RCT Registry. May 27. https://doi.org/10.1257/rct.725-1.0.
Former Citation
Galiani, Sebastian and Marcela Melendez. 2015. "On the Effect of the Costs of Operating Formally." AEA RCT Registry. May 27. https://www.socialscienceregistry.org/trials/725/history/4310.
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Experimental Details
Interventions
Intervention(s)
Firms were randomly assigned to the target groups for the two interventions or to a control group. One of the interventions consisted of workshops run by CCB instructors. The CCB invites informal-sector entrepreneurs to these workshops so that it can provide them with information about the advantages and disadvantages of operating formally. It also provides information about the registration process. The workshop lasted two hours and then allowed for additional time to provide more information about the registration process to interested entrepreneurs. The person in charge of providing this information to the entrepreneurs then contacted them by telephone in order to arrange a meeting at the CCB to start off the registration procedure. This follow-up support began at the time that the entrepreneur expressed interest in registration after the workshop and ended when the firm obtained its business license.

The second intervention consisted of personalized visits to interested firms by CCB agents who gave them the same information that was imparted at the workshop and assisted them with the registration process if they wished to have that type of support. As is also true of the workshop, this kind of program is a regular activity of the CCB. The firms included in our sample had never received these kinds of visits, however, and an arrangement had been made with the CCB not to make such visits again until the experiment was over. The CCB-trained agents visited entrepreneurs after having phoned them and, if they agreed, setting a date and time for the visit. The CCB does not send agents to visit entrepreneurs unless they agree to meet with a CCB agent during the initial phone call. After the first visit, which is for information purposes only, CCB agents return only to the firms that agree to register.
Intervention Start Date
2011-10-01
Intervention End Date
2012-03-30
Primary Outcomes
Primary Outcomes (end points)
Decision to operate formally at the firm level gathered from administrative records from the Chamber of Commerce of Bogotá, Colombia.
Primary Outcomes (explanation)
Secondary Outcomes
Secondary Outcomes (end points)
Secondary Outcomes (explanation)
Experimental Design
Experimental Design
Firms were randomly assigned to the target groups for the two interventions or to a control group. One of the interventions consisted of workshops run by CCB instructors. The CCB invites informal-sector entrepreneurs to these workshops so that it can provide them with information about the advantages and disadvantages of operating formally. It also provides information about the registration process. Workshops of this type had never been offered before in the area of Bogotá where the firms in our sample are located, and the CCB agreed not to hold any additional workshops there until after our study was completed. The workshops that took place during our study were held at the local CCB office in Restrepo, which was close to the firms included in our sample.
The workshop included: (1) a description of what formality in Colombia entails; (2) a discussion of the advantages of operating in the formal sector, including the possibility of doing more and better business with other formal-sector firms, of attending free training courses and of receiving assistance from the CCB to improve the way in which the business was being managed; (3) instructions about how to navigate the registration process; and (4) examples of successful firms that started out in the informal sector but then moved into the formal sector of the economy.
The workshop lasted two hours and then allowed for additional time to provide more information about the registration process to interested entrepreneurs. The person in charge of providing this information to the entrepreneurs then contacted them by telephone in order to arrange a meeting at the CCB to start off the registration procedure. This follow-up support began at the time that the entrepreneur expressed interest in registration after the workshop and ended when the firm obtained its business license.
The second intervention consisted of personalized visits to interested firms by CCB agents who gave them the same information that was imparted at the workshop and assisted them with the registration process if they wished to have that type of support. As is also true of the workshop, this kind of program is a regular activity of the CCB. The firms included in our sample had never received these kinds of visits, however, and an arrangement had been made with the CCB not to make such visits again until the experiment was over. The CCB-trained agents visited entrepreneurs after having phoned them and, if they agreed, setting a date and time for the visit. The CCB does not send agents to visit entrepreneurs unless they agree to meet with a CCB agent during the initial phone call. After the first visit, which is for information purposes only, CCB agents return only to the firms that agree to register.
Experimental Design Details
Randomization Method
Done in office at ECON-ESTUDIO by a computer.
Randomization Unit
Randomization was done at the firm level.
Was the treatment clustered?
No
Experiment Characteristics
Sample size: planned number of clusters
Randomization was done at the firm level. There are no clusters in the study.
Sample size: planned number of observations
2099 firms.
Sample size (or number of clusters) by treatment arms
The final sample of 1,927 firms was randomly divided into three groups. The first one, with 362 firms (19% of the sample), was the control group. The second group, made up of 1,017 firms (53% of the total), was assigned to the workshop treatment arm of the study. The third group, composed of 548 firms (28% of the total), was assigned to visits arm of the study.
Minimum detectable effect size for main outcomes (accounting for sample design and clustering)
IRB
INSTITUTIONAL REVIEW BOARDS (IRBs)
IRB Name
University of Maryland
IRB Approval Date
2014-04-16
IRB Approval Number
732934-1
Post-Trial
Post Trial Information
Study Withdrawal
Intervention
Is the intervention completed?
No
Is data collection complete?
Data Publication
Data Publication
Is public data available?
No
Program Files
Program Files
Reports and Papers
Preliminary Reports
Relevant Papers