Aspirations, performance feedback, and informal entrepreneurs' decision to formalize

We develop a theory explaining the conditions influencing entrepreneurs' decisions to formalize versus remain informal. Building on the behavioral theory of the firm, we argue that formalization is a viable strategy for informal entrepreneurs with growth needs who perform below opportunity-based aspirations to generate new sources of revenue, and for entrepreneurs with survival needs who perform above necessity-based aspirations to secure a durable livelihood. Conversely, entrepreneurs performing above their opportunity-based aspirations avoid formalization to maintain informal advantages, whereas entrepreneurs performning below their necessity-based aspirations perceive survival as particularly salient and thus avoid formalization. Moreover, the likelihood of formalizing, as a function of the performance relative to both necessity- and opportunity-based aspirations, is moderated by the level of meso-institutional support for formalization. We contribute by conceptualizing formalization as a complex strategic decision surrounded by severe uncertainty with important consequences for informal entrepreneurship. This reconceptualization enables us to frame aspirations as an important source of heterogeneity among informal entrepreneurs, shaping how they evaluate and respond to the prospect of formalization.