"Factor Allocation, Informality and Transit Improvements: Evidence from Mexico City" JMP [Download PDF]
The presence of the informal sector in the developing world creates wedges and factor misallocation across firms that ultimately lowers 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 microdata and exploit the construction of new subway lines in Mexico City with a spatial general equilibrium model. I find evidence that transit improvements lead to a reduction in informality rates by 4.0 percentage points among affected areas, implying that workers are reallocating to firms with higher total factor revenue productivity. 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 key elasticities of the model. I show that changes in allocative efficiency driven by the reallocation of workers to the formal sector explain approximately 13-23% of the total gains and that the average real income per every dollar spent on infrastructure increases by 15% relative to a perfectly efficient economy.
"Measuring Imperfect Competition in Product and Labor Markets. An Empirical Analysis using Firm-level Production Data" (with Darío Tortarolo) [Download PDF] [Slides] (New version with exchange rate shocks coming soon)
We disentangle the extent of imperfect competition in product and labor markets using plant-level data. We derive a formula for the ratio between markups and markdowns assuming cost-minimizing firms that face upward-sloping labor supply and downward-sloping product demand curves. We then separate this combined measure of market power by estimating firm-level labor supply elasticities instrumenting wages with intermediate inputs. Our results suggest that both markets exhibit imperfect competition, but the variation is mainly driven by markups. Additionally, we estimate the relative gains of removing market power dispersion on allocative efficiency, finding that markups are more important on TFP than markdowns.