Firm Dynamics and Institutional Participation: a Case Study on Informality of Micro-Enterprises in Peru

Abstract

Using panel data on micro-enterprises from Peru we find evidence suggesting that firm dynamics explain 'formality', where formality is recast as the firm's decision to participate in societal institutions. The results suggest that differences in unobservable factors, such as entrepreneurial ability, contribute largely to differences in growth rates, survival chances and societal participation. After controlling for such unobserved heterogeneity, we find that the probability of participation increases with firm size but not with years in business. Changes in participation status over time are sensitive to the initial size and growth trajectory of the firm.