Rev Ind Organ (2009) 34:349–371
Small Firms and Formality: The Inﬂuence of Judicial
Efﬁciency and Regulation Costs
Jeffrey B. Nugent · Grigor Sukiassyan
Published online: 24 July 2009
© Springer Science+Business Media, LLC. 2009
Abstract Small ﬁrms face three serious problems, namely, the high costs of
regulation, of contract enforcement, and of ﬁnance. A simple model is developed
to explain why in dealing with these problems small ﬁrms choose different strategies.
Special emphasis is given to the effects of regulation costs and judicial efﬁciency
on these choices. Several propositions concerning these effects are derived from the
model and tested with data on Mexican microenterprises. The results support most
hypotheses, and show that ﬁrms obtain more credit when they either register with
ofﬁcial entities or participate in private associations and especially when they do both.
Keywords Regulation costs · Contract enforcement · Efﬁciency of the legal system ·
Microenterprise · Mexico
JEL Classiﬁcations D21 · D63 · L1 · O12 · O17
Small ﬁrms in regulated environments in most (perhaps all) countries face three
serious problems: the high costs of capital, of regulations, and of contract enforcement.
While considerable attention has been given to the differing degrees of success that
ﬁrms achieve in dealing with their common problems, much less has been given to the
J. B. Nugent (
Department of Economics, University of Southern California, Los Angeles, CA 90089-0253, USA
California State University, Fullerton, CA, USA