The effect of commuting costs and transport subsidies on informality rates

In this article we study the relationship between accessibility and informality using a spatial search model. In the model, formal workers commute every day to the Central Business District (CBD) to work in formal firms. Informal workers choose their commuting frequency knowing that they either can work at home and save on commuting costs, or have a higher remuneration at the CBD but incur commuting costs. We demonstrate that the difference in urban costs between formal and informal workers is a mechanism through which improvements in accessibility lead to lower informality rates. Next, we use the model to compare the impact and efficiency of four policy options: a hiring-costs subsidy and a transport subsidy for either all workers, formal workers, or informal workers. We find that a transport subsidy targeted at informal workers is undesirable. We also find that a hiring-costs subsidy is superior to transport subsidies in reducing informality.