Resumo

The central feature of informal economy is that it is unregulated by the institutions of society, in a legal and social environment in which similar activities are regulated (Castells and Portes, 1989). Despite their prevalence in emerging economies, we know relatively little about informal organizations, such as how being informal affects firm performance (Assenova and Sorenson, 2017). The article's main target is to observe the performance difference between informal and formal firms and to identify among the price´s strategies available which is better for the performance of informal firms.

Previous literature about the characteristics that determine the existence of informal firms, leads us to believe that the performance of both the types of firms are affected by these characteristics and produce different result. Therefore, first hypothesis will be tested is: H1: The informal and formal firms have different performance. Price is one of the most relevant variables used as strategy by firms. Considering traditional methods determine final selling price, second hypothesis is: H2: Different pricing strategies impact on performance of informal firms compared to formal firms.

Informal firms can improve their performance (compared to formal firms) avoiding paying taxes and fees (Ordonez, 2014; Iriyama et al., 2016), benefitting from unfair competition (Kettles, 2007), skirt labor, health, and environmental regulations (Blackman, 2000; Perry et al., 2007). On the other hand, informal firms may pay some type of corruption to going unregistered officially (Feige 1999, Loayza et al. 2005, Dutta et al. 2013, McCann and Bahl 2017), their costs can be more elevated. This characteristics may affect informal firms' performance comparing to formal firms (H1).

Using data from a rare survey (The Urban Informal Economy Survey - Pesquisa de Economia Informal Urbana, ECINF), produced by the Brazilian Bureau of Statistics (IBGE) which includes data from small informal and formal firms (up to five employees), we use the two-stage least-squares methodology to produce robust causal evidence between the formal and informal firms and their both performance and price strategy. The dependent variable in second stage is performance. Independent main variables are informality, pricing strategy sector, state, controlling by difficulties and owners' education.

The average revenue per hour of firms is 156.35 Reais per hour (the Brazilian currency) and if the status of the firm is informal, this revenue is lower in 139.92 Reais. Thus, the revenue per hour is 16,43 Reais smaller. These results assure that informal and formal firms have different performance (our hypothesis H1 is valid). By observing the results using pricing strategies in the second stage regression, different pricing strategies are influencing the difference of performance between informal and formal firms. Our hypothesis H2 is also valid.

Assenova and Sorenson (2017) found that firms that formalize their business earlier have better performance than other firms. Although we do not work with the history of firms, the status of informality of firms is associated with a worse performance when we compared with firms that have the status of formality. The second hypothesis has also been confirmed. We can observe that different pricing strategies can impact on performance of informal firms compared to formal firms, especially when pricing strategy is customer value-based pricing (Hinterhuber, 2008).

Assenova, V. A., and Sorenson, O. (2017). Legitimacy and the benefits of firm formalization. Organization Science, 28(5), 804-818. Piperopoulos, P., Kafouros, M., Aliyev, M., Liu, E. Y., and Au, A. (2021). How does informal entrepreneurship influence the performance of small formal firms? A cross-country institutional perspective. Entrepreneurship and Regional Development, 1-20. Ulyssea, G. (2018) Firms, Informality, and Development: Theory and Evidence from Brazil, American Economic Review, 108(8): 2015–2047