The Impact of Formalization Program on Informal Household Enterprises Performance : Evidence From a Quasi-experiment in Nigeria

While the formalization program is a popular policy instrument in many countries, the effects on the performance of informal household enterprises in emerging economies are unclear. This study's analysis begins by establishing the context for the rational exit theory. This study experimentally studies the causal effects of a formalization reform program on the performance of informal household enterprises in Nigeria over two time periods: 2018 and 2020. It analyzes a reform that halved business registration for informal small and medium-sized enterprises (SMEs). In this analysis, two sources of variation for causal identification (subsidized costs of business registration and Business Incentives Strategy reform implementation timeframe) are used. This study relies on difference-in-difference (DID) and propensity score matching (PSM) approaches to account for endogeneity bias that may arise if determining factors or time-variant unobserved factors influence both the decision to formalize and subsequent enterprises performance. The results indicate that enterprise owners who formalize their operations increase their value added (26%) and their net profits (27%) on average. The findings also show that formalization improves access to electricity, internet usage, enterprise size, borrowed money, investment, bookkeeping, product supply, customer access, competition, and decreased outside premises. However, this study finds no evidence that formalization improves access to water. Evidence on mechanism suggests the results are driven by access to electricity, enterprise size, investment, and mobile phone. Although these effects are small, they are focused primarily among self-employed enterprise owners. The findings are robust to several estimating methods and testing