Informality and Development: The Role of Transportation Infrastructure in Reducing Self-Employment

Abstract

I study the effects of improvements in transportation infrastructure on informality. To deal with endogeneity issues, I implement two complementary identification strategies. First, taking advantage of the staggered rollout of highways, I apply a generalized difference-in-difference regression model. Second, I conduct an instrumental variable strategy by exploiting the fact that municipalities along the route of important cities in Brazil were more likely to be connected to the federal highway system. I find that, once a municipality is connected to the federal highway network, there is a reduction in informality, measured by the self-employment rate among non-agricultural, low-skilled workers. Moreover, I show that connected municipalities have higher GDP per capita, larger firms in the formal sector, and higher demand for formal employment. These results suggest that better transportation infrastructure induces the growth and development of the formal sector.

Nicolás Guida-Johnson

Assistant Professor

I am an Assistant Professor of Economics at Pontificia Universidad Javeriana.