Exit from Informality: The Stick Treatment

Abstract

Most firms are informal throughout the developing world. Most small and medium enterprises (SMEs) (60-80%) do not register with tax authorities, lowering the tax base. This remains a persistent phenomenon despite the numerous attempts made to encourage registration. While those interventions focused largely on a carrot approach, the authors tested the effectiveness of a stick intervention. The latter involves threat of fines if SME are caught and have still not registered after a grace period. Their intervention increased the rate of registration, but the overall number of registered firms remained quite small. This research was funded under the Private Enterprise Development in Low-Income Countries (PEDL) Programme