ABSTRACT
Easy access to legal firm registration has been identified as one of the major determinants of the existence of informality. in his influential book, “The Other Path, ” de Soto (1989) argues that informality is the rational response of agents to the inefficiencies and high entry costs in the formal sector. A major worldwide data collection effort is being made at the World Bank Doing Business project to measure and monitor the evolution of a number of indicators on the barriers to legally operate a business. These new data have shown tremendous differences in the ease of starting businesses across the globe. The bureaucratic costs of establishing a firm in a OECD country average around 5% of gross national income (GNi); in sub-Saharian Africa it is around 150%. it is well known that the excessive red tape in developing economies leads to an oversized unofficial or informal economy. Djankov et al. (2002) argue that a 1% increase in start-up costs increase the level of informality by 6.5%. Furthermore, policy is being shifted towards a lower regulation of entry environment. According to the Doing Business website, between April 2006 and June 2007, 98 countries undertook reforms towards a less regulated environment. Some of those reforms are already being evaluated. in Mexico a municipality-level reform reducing drastically the time and expenses needed to open a firm (SARE) has proven to be successful in fostering the registration of new formal firms (see Kaplan, Piedra, and Seira 2006, and Bruhn 2006).
