This dissertation studies the effect of different policy interventions on allocative efficiency in developing countries. It evaluates how urban and antitrust policies may generate a better allocation of resources across firms, increasing aggregate welfare, and productivity. To provide causal evidence, it collects rich microdata at a very high granular level and exploits plausibly exogenous variation of the main mechanisms. It complements the main empirical findings with quantitative general equilibrium models that allow simulating the effect of different policy interventions.

One of the main factors that explain factor misallocation in developing countries is the informal sector. The fact that firms face different tax schedules generate differences in marginal products of labor. The first chapter of my dissertation proposes a new mechanism to account for the significant presence of the informal economy in developing countries: the high commuting costs to transit within cities. I provide evidence of three different empirical facts that align with this hypothesis. First, due to the high commuting costs, most workers in Mexico City have poor access to formal employment. Second, workers that operate in the informal economy are more sensitive to commuting costs, which implies that it is easier to substitute informal jobs. Third, I exploit the construction of line B of the subway in Mexico City to provide causal evidence of the negative relationship between informality and transit improvements. I estimate a series of difference-in-differences specifications, finding that transit improvements lead to a reduction in informality rates by four percentage points in nearby areas to the new stations relative to other places in Mexico City. This result indicates that workers reallocate to firms with higher total factor revenue productivity, increasing the welfare effects of transit improvements relative to the estimates from previous literature.

A fundamental question for economists and policymakers is to measure the welfare effects of transit infrastructure that reduce transit times within a city. While the literature has estimated the `direct'' effects of these projects, there are substantial ``indirect'' effects that previous work has ignored. The second chapter develops a spatial general equilibrium model to account for the ``direct'' effects and also for the "indirect" effects driven by the reallocation of workers from the informal into the formal economy. I extend recent theoretical work in the urban literature by adding distortions that generate resource misallocation. From a first-order approximation, I provide a formula that decomposes the welfare effects of trade and commuting shocks into a ``pure'' effect term and an allocative efficiency margin. I estimate the main elasticities of the model exploiting variation from transit shocks. With these parameters at hand, I simulate different counterfactual interventions. The main findings suggest that line B of the subway increased welfare between 1.3\% and 1.6\%, that the indirect effects explain approximately 15-25\% of the total gains, and that the average real income per every dollar spent on infrastructure increases by 15\% relative to a perfectly efficient economy.

In addition to the informal sector, there can be other sources of resource misallocation in developing countries. The third chapter, co-authored with Dario Tortarolo, focuses on the role of market power in explaining differences in marginal products of labor across plants. We disentangle the extent of imperfect competition in product and labor markets, assuming cost-minimizing firms that face upward-sloping labor supply and downward-sloping product demand curves. In the first part, we derive a formula for the ratio between markups and markdowns. We compute this ratio by estimating the output elasticity with respect to labor and the wage bill share. We disentangle the measure of market power specific to each firm by estimating labor supply elasticities using as an instrument intermediate inputs. Our results suggest that both markets exhibit imperfect competition, but markups mainly drive the variation. We assume a general equilibrium model to measure the relative gains of removing market power dispersion on allocative efficiency. The findings suggest that markups are more critical in explaining TFP than markdowns.