The majority of firms in most developing countries are informal. In Sri Lanka only one-fifth of firms operating without paid workers are registered with any government agency. Even among firms employing paid workers, the majority are unregistered with one or more pertinent agencies.
Researchers from the World Bank, Sri Lanka's University of Peradeniya and United Kingdom's University of Warwick designed a field experiment to measure the latent demand for formalization, and the consequences that formalizing has on informal firms. The experiment provided informal firms incentives to formalize. A sample of informal firms with one to 14 paid employees in two largest Sri Lanka cities were divided into four treatment groups and a control group. The first treatment group was given information about the costs and benefits of, and procedures for, registering their firm for tax purposes, and offered reimbursement for the cost of registering, about 1000 Sri Lankan Rupees (LKR). The second, third, and fourth treatment groups were provided the same information and also offered a payment of 10,000 LKR, 20,000 LKR and 40,000 LKR (approximately US$88, $175 and $350 respectively) to register.
Baseline survey was conducted in December 2008 with the sample of 520 businesses. Three follow-up surveys of these same firms were carried out in August 2010, March 2011 and December 2011 to examine whether and how the firms benefited from formalization.