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The Impact of Economic Institutions on Small Firms in Developing Countries

Abstract : In many developing countries, economic institutions are failing. This translates into structural problems such as widespread informality, rampant corruption and the impossibility for governments to raise taxes. This thesis study how economic policies affect economic institutions in developing countries. It focuses on two broad questions: (1) What are the effects of policies to reduce informality? and (2) how are new technologies reshaping the way governments collect taxes?The first chapter uses a randomized experiment to study the introduction of a new legal status in Benin, created to make it easier for small firms to become formal. To make this new status attractive, the government added supplementary incentives designed to enhance the presumed benefits of formalizing. We find that few firms register when just given information about the new regime, but our full package of supplementary efforts boosts formalization by 16.3 percentage points. However, this formalization does not bring firms higher sales, profits or access to credit, and the cost of formalizing these firms exceeds the added taxation they will pay over the next decade. We show how better targeting of these policies towards firms that look more like formal firms to begin with can increase the formalization rate and improve cost-effectiveness. The second chapter studies the impact of formalization on intra-household relationships, still in Benin. The idea behind this chapter is that formalization changes effective property rights by clarifying who in the household is the legal owner of the business and who will keep it in case of divorce. The causal effect of formalization is identified using the same random experiment used for the first chapter. We find first that formalization increases entrepreneurs' (both male and female) control over household revenue. They contribute proportionally less to household expenditures and to the personal expenses of their partner. Second, using a behavioral game, we find strong gender differential effects of formalization on the probability that entrepreneurs pay to hide a windfall transfer from their spouse. Female entrepreneurs are much more likely to pay to hide, while male entrepreneurs are much less likely to do so. Using a theoretical model, we show that this result is compatible with the idea that women entrepreneurs are constrained and cannot invest as much as they would like in their own business. Women who became formal hide the windfall transfer more because they have more property rights and want to invest more in their business. Our conclusion is that formalization has important effects on intra-household dynamics.The third and final chapter of this thesis deals with the second question and examines how internet is changing the way taxes are collected. Specifically, we study the impact of electronic tax filing (e-filing) for small firms to replace in-person submission of paper-based forms to tax officials. We examine the impact of e-filing on compliance costs, tax payments, and bribes payments using experimental variation and data from Tajikistan firms. We find that firms that e-file have lower compliance costs, spending five fewer hours each month on fulfilling tax obligations. There are no significant average effects of e-filing on tax or bribe payments, but significant heterogeneity exists across firms by their baseline likelihood of tax evasion. Among firms previously more likely to evade, e-filing doubles tax payments, likely by disrupting collusion with officials. Conversely, among firms less likely to have been evading, e-filing reduces tax payments, suggesting that officials had previously required them to pay more. These firms also pay fewer bribes, as e-filing reduces opportunity for extortion. Our conclusion is that e-filing reduces compliance costs and makes the distribution of tax payments across firms arguably more equitable.
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Submitted on : Friday, March 12, 2021 - 10:32:08 PM
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Victor Pouliquen. The Impact of Economic Institutions on Small Firms in Developing Countries. Economics and Finance. École des hautes études en sciences sociales (EHESS), 2019. English. ⟨NNT : 2019EHES0190⟩. ⟨tel-03168311⟩



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