@misc{37243,
title = {A Framework to Study Agglomeration, Informality, and Firm Dynamics (Discussion Paper)},
author = {Chauvin, Juan Pablo and Talamas Marcos, Miguel Ángel},
year = {2025},
doi = {10.18235/0013759},
abstract = {In this discussion paper we present a framework to analyze how urban agglomeration affects firm informality and the mechanisms behind this relationship. This framework extends a model with extensive and intensive informality margins (Imbert and Ulyssea, 2025) to incorporate agglomeration forces. Firms maximize static profits under CobbDouglas technology and choose (i) whether to operate formally or informally, and (ii) among formal operators, the share of workers hired informally. Agglomeration works through two forces: it shifts productivity paths upward and it raises the expected costs of informality (for fully informal operators and for informal hiring within formal firms). These ingredients generate clean cutoff rules for exit and for formalization, and imply that the off-the-books hiring share chosen by formal firms falls with density. In a stationary equilibrium, denser cities display higher average productivity (from level shifts and tighter selection), less informality on both margins, and a greater likelihood of formal entry. Conditional on status, agglomeration acts mainly as a level shifter rather than changing within-firm growth rates.},
url = {https://doi.org/10.18235/0013759}
}