Title: VAT pass-through with an informal sector: Evidence from Mexico (with Pierre Bachas, Lucie Gadenne, Anders Jensen)

Abstract: In January 2014, the Mexican Value-Added Tax (VAT) was increased from 11% to 16% in areas close to international borders, while in the rest of the country the tax rate remained at 16%. Using a difference-in-differences approach for taxed products, we estimate the effect of the VAT on Mexican consumer prices to be equal to 20%. This figure increases to 26% when only formal stores are considered. By contrast, pass-through for informal stores is non-significant. Since poorer households tend to rely more on unregulated markets, the results in this work suggest that the existence of the informal retail sector can work as a market institution that shelters low-income consumers from adverse economic policy.