How many points do you need to qualify to migrate to Australia? What is the cost of applying? How much money do you need to set up a bank account in the Cayman Islands? What is the procedure for getting money out of these accounts when you want to spend it?
My guess is that most of you don’t know the answers to these questions. But does that then mean that I should expect an information campaign to inform you about these things will lead to me finding you lounging next to the Great Barrier Reef sipping cocktails paid for from your Cayman’s Bank? Of course not, yet this is the type of inference we often make in development programs.
Zero impact of information after regulatory reform efforts
As a case in point, consider three recent experiments which have tried to encourage informal firms to formalize. I was involved in such experiments in Sri Lanka and Brazil, while Giacomo de Giorgi and Aminur Rahman carried out related work in Bangladesh. The challenge in all three places was that despite recent simplification efforts along the lines of those suggested by Doing Business, most informal businesses remained informal. Moreover, business owners seemed misinformed about the process and cost of registering their businesses formally, with most overestimating both the time taken to go through the process and the cost of doing so.
For example, in Sri Lanka, only 17 percent of informal businesses knew the correct cost of registering, and only 2 percent knew what the income tax would be for a typical business. In Brazil, the mean (median) time firm owners think it takes to register once all documents are provided is 51 days (30 days), whereas in practice the average time taken is 7 to 9 days; they also estimate that the cost of registering is 6 times the true cost.
So here we have cases where the Governments had introduced a new policy, firms are misinformed about it, and so the hope is that giving these firms the correct information will cause them to respond to the new policy. But what happened in practice? Three very precise zero effects: in all three cases, when firms were given information about how to register, no more firms registered than in a control group where this information wasn’t given.
How costly is information to acquire anyway?
Clearly in these three cases information alone was not the constraint preventing firms from registering. My interpretation is that when there are many other reasons (such as avoiding taxes, and seeing few benefits from registering) that cause informal firm owners to decide to remain informal, then there is no reason for them to seek out the correct information about a process they never plan to undertake – just as there is no reason for you to seek out information on how to migrate to Australia with Cayman Bank account intact unless this is something you are thinking about doing.
Firm registration is a case where the information is out there, and firms who want to acquire it probably don’t face too much in the way of costs in doing so. I think the allure of information campaigns in part comes from a few studies where it has been spectacularly successful – Robert Jensen’s work in informing school students in the Dominican Republic about the returns to education and Pascaline Dupa’s work on informing girls in Kenya about the relative risks of having sex with older vs younger men are obvious examples that come to mind. A common characteristic of both cases was that the information being provided was much harder for individuals to acquire on their own, even if they wanted to (in Jensen’s case because the successful individuals left the rural communities, so that their information was lost to those who remained, in Dupas, because this was a rather sensitive topic with no obvious source for students to get this information, even if they could have thought about trying to acquire it). i.e. information was costly to acquire. Contrast this with a lot of the much less successful ABC type campaigns to reduce HIV/AIDS transmission – where in a lot of cases, the costs of acquiring the information part of the campaign were probably quite low in many cases.
Of course, there can also be a behavior change/social norm modification part of information campaigns, where the point is not just the information about how to do something, but also the information that this is something a lot of others are thinking about changing their behavior about. I know this literature a lot less well, but my sense is this is hard to do, with lots of failed examples for every supposed success. But given the possibility that informality is a social norm as much as a calculated trade-off between private costs and benefits of becoming formal, this is an avenue that seems a good possibility for future experimentation – whereas just information alone seems unlikely to be that effective.
My guess is that most of you don’t know the answers to these questions. But does that then mean that I should expect an information campaign to inform you about these things will lead to me finding you lounging next to the Great Barrier Reef sipping cocktails paid for from your Cayman’s Bank? Of course not, yet this is the type of inference we often make in development programs.
Zero impact of information after regulatory reform efforts
As a case in point, consider three recent experiments which have tried to encourage informal firms to formalize. I was involved in such experiments in Sri Lanka and Brazil, while Giacomo de Giorgi and Aminur Rahman carried out related work in Bangladesh. The challenge in all three places was that despite recent simplification efforts along the lines of those suggested by Doing Business, most informal businesses remained informal. Moreover, business owners seemed misinformed about the process and cost of registering their businesses formally, with most overestimating both the time taken to go through the process and the cost of doing so.
For example, in Sri Lanka, only 17 percent of informal businesses knew the correct cost of registering, and only 2 percent knew what the income tax would be for a typical business. In Brazil, the mean (median) time firm owners think it takes to register once all documents are provided is 51 days (30 days), whereas in practice the average time taken is 7 to 9 days; they also estimate that the cost of registering is 6 times the true cost.
So here we have cases where the Governments had introduced a new policy, firms are misinformed about it, and so the hope is that giving these firms the correct information will cause them to respond to the new policy. But what happened in practice? Three very precise zero effects: in all three cases, when firms were given information about how to register, no more firms registered than in a control group where this information wasn’t given.
How costly is information to acquire anyway?
Clearly in these three cases information alone was not the constraint preventing firms from registering. My interpretation is that when there are many other reasons (such as avoiding taxes, and seeing few benefits from registering) that cause informal firm owners to decide to remain informal, then there is no reason for them to seek out the correct information about a process they never plan to undertake – just as there is no reason for you to seek out information on how to migrate to Australia with Cayman Bank account intact unless this is something you are thinking about doing.
Firm registration is a case where the information is out there, and firms who want to acquire it probably don’t face too much in the way of costs in doing so. I think the allure of information campaigns in part comes from a few studies where it has been spectacularly successful – Robert Jensen’s work in informing school students in the Dominican Republic about the returns to education and Pascaline Dupa’s work on informing girls in Kenya about the relative risks of having sex with older vs younger men are obvious examples that come to mind. A common characteristic of both cases was that the information being provided was much harder for individuals to acquire on their own, even if they wanted to (in Jensen’s case because the successful individuals left the rural communities, so that their information was lost to those who remained, in Dupas, because this was a rather sensitive topic with no obvious source for students to get this information, even if they could have thought about trying to acquire it). i.e. information was costly to acquire. Contrast this with a lot of the much less successful ABC type campaigns to reduce HIV/AIDS transmission – where in a lot of cases, the costs of acquiring the information part of the campaign were probably quite low in many cases.
Of course, there can also be a behavior change/social norm modification part of information campaigns, where the point is not just the information about how to do something, but also the information that this is something a lot of others are thinking about changing their behavior about. I know this literature a lot less well, but my sense is this is hard to do, with lots of failed examples for every supposed success. But given the possibility that informality is a social norm as much as a calculated trade-off between private costs and benefits of becoming formal, this is an avenue that seems a good possibility for future experimentation – whereas just information alone seems unlikely to be that effective.
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