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Standard economic theory assumes that individuals’ preferences are independent of their social environment. However, this basic assumption seems partly unrealistic because individual utility can be affected by a variety of social interactions. This paper assesses the role of peer effects on the informality of Micro and Small firms. We use the instrumental variable approach with fixed effects on survey data in the informal sector in Cameroon. Our results show a positive impact of informal behavior of peers of the firm on its level of informality. Thus, we find a social multiplier of 9.43 and 4.65 according to the nature of the reference group. These results show that, in reality, a policy leading one firm to formalize will lead at least nine (or four depending on the reference group) others to do so due to peer effects.

Endogenous peer effects and level of informality: some evidence from micro and small firms in Cameroon