Retail Sector and Economic Development

We build a model for emerging economies where households could search goods through two retail platforms: the legal organized (supermarket) and the informal unorganized (mom-and-pop store). We highlight the role of the retail sector as a special two-sided platform in goods market. A positive shock on the productivity of supermarket pulls both consumers (demand) and firms (supply) to make transactions there. This effect is amplified through the interaction between demand and supply, motivating manufacturing firms to become formal to supply goods through this channel. We do the quantitative exercise for the Indian economy; a 1 percent increase in the productivity of organized retailers leads to an increase in the aggregate productivity of 0.3 percent, 80 percent of which is contributed indirectly by the shift in the manufacturing sector.