Roman D. Zarate, UC Berkeley
Does transit infrastructure improve allocative efficiency? Are the welfare gains of these projects larger or smaller considering this channel? This paper examines the impact of transit improvements on allocative efficiency by analyzing its effect on the informal sector. I combine a rich collection of Mexican microdata and exploit the construction of new subways lines with a spatial general equilibrium model. I provide a formula that decomposes the welfare impact of commuting/trade shocks in a "pure'' effect term, an allocative efficiency term, and an agglomeration externality component. I find evidence of a negative relationship between informality and transit improvements. This result suggests that workers are moving to firms with higher total factor revenue productivity (TFPR) improving allocative efficiency. I quantify the aggregate welfare gains of new infrastructure and show that allocative efficiency drives a significant fraction of the total gains.