AFAM Biennial Conference, 6th Biennial Conference - Cairo 2023

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Performance Discrepancy, Social Embeddedness, and Informal Firms’ Willingness To Formalize
Selorm Agbleze

Last modified: 2022-08-15


Drawing on the behavioral theory of the firm and social embeddedness theory, I test a behavioral mechanism by which the search for improved performance rather than improved performance by itself triggers informal firms' willingness to formalize. I test the proposed mechanism using a random sample of 1,898 informal firms across 10 Latin American and African countries. I find that informal firms with sales performance below their aspiration level are more willing to formalize than informal firms with sales performance equal to or above aspiration level. I further test the moderating effect of two dimensions of social embeddedness, family and local embeddedness, on the proposed mechanism. I find that social embeddedness affects the relationship between performance discrepancy and willingness to formalize but primarily among firms with performance above aspiration level.




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