Legitimacy and the Benefits of Firm Formalization

Entrepreneurs in many emerging economies start their firms informally, without registering with the state. We examine how informality at the time of founding affected the performance of 12,146 firms in 18 countries across sub-Saharan Africa. Our findings indicate that entrepreneurs who registered their firms at founding enjoyed greater success in terms of sales and employment. But these benefits varied widely across countries. Consistent with the idea that legitimation processes account for these benefits, countries in which people trust their government more had larger advantages associated with being formal.