Informality and the Life Cycle of Plants

Overview & Synopsis

This paper documents the life cycle of formal and informal plants using five waves of the Mexican establishment census. Formal plants begin operations with three times more workers than informal plants and exhibit faster growth rates. Throughout their life cycle, formal establishments more than double their size, while informal plants increase their size by only 77%. A general equilibrium model is developed to quantify the aggregate economic losses stemming from these growth rate disparities. In the model, plants grow through productivity investments, and informality emerges from incomplete enforcement. In equilibrium, informal plants exhibit flatter life cycle profiles to avoid detection and taxation. Model parameters are calibrated to match key properties of plant size distribution and the life cycle of plants in Mexico. Quantitative results indicate that a revenue-neutral full enforcement increases aggregate output and the overall growth rate by sixteen and twenty-five percent relative to the benchmark, respectively.