The dissertation explores the impact of trade liberalization on heterogeneous firms in the presence of informality. In the first paper, I investigate the role of the informal sector in the impact of trade liberalization on welfare, employment and wage inequality in a model of trade with heterogeneous firms. The findings suggest that trade liberalization reduces informal employment unambiguously. Contrary to the extant literature, however, its impact on welfare, total employment and wage inequality is country-specific. The second paper introduces product-level regulation as new driver of informality in a model of heterogeneous multi-product firms and endogenous product choice, where firms face regulation at both firm- and product-level and may comply with or evade either. The model suggests that firmlevel regulation causes informality by deterring firm registration. However, product-level regulation has two effects: it directly drives product informality within the formal sector as evasion of product regulation and indirectly deters firms from registering. When considering product-revenue distribution, formal firms are less diversified than informal firms, which implies that the formalization of economies may entail welfare loses due to decreased product diversity. The third paper studies trade liberalization, informality and corruption. Informality is commonly seen as response to regulations and weak institutions. Yet, regulatory changes, such as trade liberalization, and institutions interact, rendering their joint effect on formality ambiguous. I therefore study the impact of trade liberalization on firm formality in a model of heterogeneous firms and endogenous corruption. The model suggests that a higher entry cost to the formal sector, entailing more corruption, and trade liberalization decrease formality. However, as trade liberalization reduces corruption, the formal sector is less responsive to trade in economies with higher entry cost, hampering the selection effect of trade. An instrumental variable panel data analysis on Vietnamese SME surrounding Vietnam's WTO accession confirms the predictions.