Comparing estimated and self-reported mark-ups for formal and informal firms in an emerging market context
Using a 10-year panel survey covering Vietnamese manufacturing firms, we consistently obtain firm-specific mark-up estimates and relate these to firm-level formality.
The average firm-specific mark-up using a trans-log revenue production function specification is estimated to be 1,445, with substantial underlying variation across firm size, location, sector, and ownership form. Zooming in on firm-level registration, we find a formality premium of 16 per cent, even when controlling for selection into formality.
Moreover, a firm size threshold exists, confirming that smaller informal firms are less likely to reap eventual benefits of formalization. Finally, we find remarkable similarity between average self-reported and estimated mark-ups, but dynamic aspects of the two estimates along key firm dimensions differ substantially.