Estimating the Effects of Formality on Mexican Informal Microfirms. A Joint Multivariate Approach

In this article we use a multivariate framework to estimate net profits and levels of capital and labor for informal Mexican microfirms had they been formal. We estimate a Roy model to simultaneously model three different microfirm responses conditional on the sector (formal or informal) choice. Responses include profits and levels of labor and capital to be used in each sector. Our results indicate that the formal counterfactuals of currently informal microfirms employ higher levels of labor and physical capital; yet, they do not earn higher profits.