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A tale of two species : revisiting the effect of registration reform on informal business owners in Mexico

Author:	Bruhn, Miriam;	Collection Title:	Policy Research working paper ; no. WPS 5971
Country:	Mexico;	Date Stored:	2012/02/21
Document Date:	2012/02/01	Document Type:	Policy Research Working Paper
Language:	English	Major Sector:	Finance
Rel. Proj ID:	1W-The Crisis And Beyond: Fy11-Fy13 -- -- P122136;	Region:	Latin America & Caribbean
Report Number:	WPS5971	Sub Sectors:	General finance sector
SubTopics:	Access to Finance; Business in Development; Business Environment; E-Business; Competitiveness and Competition Policy	Volume No:	1 of 1

Summary: Different views have been put forward to explain why most firms in developing countries operate informally. One view argues that informal-business owners are entrepreneurs who do not register their firm because the regulation process is too complex. Another argues that informal-business owners are people trying to make a living while searching for a wage job. This paper contributes to recent literature that argues that both factors are at work. The author uses discriminant analysis to separate informal business owners into two groups: those with personal characteristics similar to wage workers, and those with traits similar to formal-business owners. The paper then examines how the two groups were affected by a business registration reform in Mexico. Informal-business owners from the second group were more likely to register their business after the reform. By contrast, informal-business owners from the first group were less likely to register but more likely to become wage workers after the reform. This is consistent with the finding in Bruhn (2008 and 2011) that the reform led to job creation. It also explains why the earlier papers find that the reform didnt affect the number of new registrations by all informal business owners.


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