Alix Naugler

We study firm turnover (i.e., entry and exit) and its consumer implications in a market characterized by asymmetric information. Using a three-round census of agro-dealers in Tanzania’s Morogoro Region, we document annual firm entry and exit rates of 33 and 17 percent, respectively. These rates are more than double those observed for non-agricultural micro-, small-, and medium-enterprises operating in similar low-income countries. To analyze how these high rates affect consumers, we develop a theoretical model of firm turnover under asymmetric information and empirically test its predictions for farmers. We find that farmers update their market-level beliefs about agricultural input quality in response to agro-dealer turnover, but how those beliefs shift depends on farmers’ prior perceptions of market quality. Farmers’ beliefs about agricultural input quality improve following an agro-dealer’s exit, consistent with our model’s prediction that consumers interpret exit as a signal that the firm sold low-quality products. In contrast, farmers who typically purchased agricultural inputs from the same agro-dealer expect new market entrants to offer lower-quality agricultural inputs, suggesting incumbent relationships help farmers manage quality uncertainty in markets with information asymmetries. As a result, agro-dealer turnover may shape and even attenuate farmers’ technology adoption decisions.

This paper examines the unintended consequences of size-dependent formalization policies that raise the cost of informality for firms, focusing on a provision in Vietnam’s Labor Code 2012. The policy sharply increases the financial penalty for firms with at least 10 formally contracted, paid employees that fail to comply with pre-existing labor regulations at this threshold. I develop a profit maximization model illustrating how this policy incentivizes firms to avoid compliance by substituting toward unregulated labor arrangements or partially formalizing. Using Vietnamese micro-, small-, and medium-enterprise panel data, I employ a difference-in-discontinuities design to estimate the causal effect of the increased financial penalty at the threshold. McCrary density tests indicate no evidence of bunching below the 10-formal, paid employee threshold post-policy. Instead, firms adjusted along alternative margins: those just below the threshold increased their reliance on unpaid labor while those just above it registered with the government but continued using informal labor. Firms just above the threshold also realized profit and labor productivity gains. These findings show that threshold-based labor policies can lead to selective—rather than comprehensive—firm formalization, suggesting informality is restructured instead of reduced.