Becker, Dennis2018-08-212018-08-212014-11-01https://hdl.handle.net/1813/58002WP 2014-21 November 2014JEL Classification Codes: L2; L5; O17This paper introduces product-level regulation as a new driver of informality and diversification in a model of heterogeneous multi-product firms and endogenous product choice. Firms face regulations at both the firm- and product-level and may comply with or evade either regulation. The model suggests that firm-level regulation directly causes informality by deterring firm registration. However, the product-level regulation has two effects: it directly drives product informality as evasion of product regulation leading to informality within the formal sector and indirectly deters firms from registering. Further, I demonstrate that the Gini coefficient and Herfindahl index can be implemented in multi-product firm models as revenue-based measures of product diversification. Contrary to the prediction of the commonly used product scope, the revenue-based measures indicate informal firms to be more diversified than formal firms.en-USheterogeneous firmsinformalityregulationsdiversificationarticle