The study provides policy recommendations to increase the productivity of micro and small firms in Bolivia and to provide incentives for firms to formalize based on a fresh understanding of firms behavior regarding formality, productivity, and profitability. The study draws upon a new qualitative analysis based on focus group interviews and a new quantitative survey of 640 firms in six industries. The survey enables to control for a rich set of measures of owner ability and business motivations that can affect both profits and the decision to formalize. The findings show that tax registration leads to significantly higher profits for the mid-size firms in the sample, but to lower profits for both the smaller and larger firms, in contrast to the standard view that formality increases profits. The qualitative analysis based on focus groups reveals that access to capital seems to be the main constraint to productivity for all micro and small firms. However, the survey indicates that while registering at the municipal level improves firms' access to finance, getting a tax number does not. In the short term, policy recommendations should focus on increasing the benefits of formalization through training, access to credit and markets, and other forms of business support. The second priority in the short term is to increase information on how to formalize and its benefits. Measures to boost the productivity of micro and small firms in general will both help overall economic growth, employment, and, indirectly, formalization.