"Factor Allocation, Informality and Transit Improvements: Evidence from Mexico City" [Download PDF]
Can transit infrastructure improve allocative efficiency by reducing informality? This paper proposes a new mechanism to account for the significant gaps in marginal products of labor across plants in developing countries: the high commuting costs to transit within cities that prevent workers from accessing formal employment. To test this mechanism, I combine a rich collection of administrative microdata and exploit the construction of new subway lines in Mexico City. First, I provide evidence that firms with higher wedges (formal) concentrate in the city center, while informal firms in the outskirts. Second, I show that informal workers are more sensitive to commuting costs than their formal counterparts, and as a consequence, work closer to their residence. Third, estimating a series of difference-in-differences specifications, I find that transit improvements reduce informality rates by four percentage points in nearby areas to the new stations. I develop a spatial general equilibrium model considering both the direct effects under perfectly efficient economies and the allocative efficiency margin due to wedges across sectors and locations. 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 workers' reallocation to the formal sector explain approximately 17-25% of the total gains, and average real income per every dollar spent on the infrastructure increases by 20% 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.