Could informality be the solution? An instrumental variable approach on the informality of M/SE in Egypt

The expansion of the informal sector constitutes one of the major issues in Egypt. Yet, micro and small enterprises (M/SEs) proved their important role on the social and economic level, but most of them are running on an informal basis. That's why this paper tries to estimate the impact of informality on the performance of M/SEs. Relying on an instrumental variable approach, the results showed that the higher is the probability of operating in the formal sector, the higher is the productivity of the firm. This effect is subject to the realization of a specific channel, which accounts for the characteristics of the firm, the entrepreneur and all the constraints faced by the firm. These findings highlight the importance of formalization policies to reduce the expansion of the informal sector.