Roman Zarate (Berkeley), “Factor Allocation, Informality and Transit Improvements: Evidence from Mexico City”

Roman Zarate (Berkeley)
Date: January 21, 2020
Time and Location: 10:00 a.m., Leacock 429

Abstract:
The presence of the informal sector in the developing world creates wedges across firms that lower Total Factor Productivity (TFP). This paper examines the impact of transit improvements on aggregate efficiency by studying the relationship between commuting, trade, and informality. To do so, I combine a rich collection of administrative microdata and exploit the construction of new sub-way lines in Mexico City. I find that transit improvements lead to a reduction in informality rates by four percentage points in nearby areas to the new stations. This result indicates that workers reallocate to firms with higher total factor revenue productivity (formal firms). I develop a spatial general equilibrium model considering both the direct effects under perfectly efficient economies and the allocative efficiency margin. From a first-order approximation, I provide a formula that decomposes the welfare impact of commuting/trade shocks into a “direct” effect and an allocative efficiency term. I quantify and decompose the welfare gains of the new infrastructure after estimating the key elasticities of the model. Changes in allocative efficiency driven by the reallocation of workers to the formal sector explain approximately 13-23% of the total gains, and average real income per every dollar spent on infrastructure increases by 15% relative to a perfectly efficient economy