Deconstructing the Missing Middle: Informality and Growth of Firms in Sub-Saharan Africa

Kaleb Girma Abreha, Xavier Cirera, Elwyn Adriaan Robin Davies, Roberto Fattal Jaef and Hibret Maemir

No 10233, Policy Research Working Paper Series from The World Bank

Abstract: This paper characterizes the firm size distribution by exploiting establishment-level censuses covering both formal and informal firms in Sub-Saharan Africa. The paper finds a "missing middle" in the employment-based size distribution of firms in four Sub-Saharan African countries. This "missing middle" hinges on the inclusion of informal firms, and it is not explained by state- or foreign-owned firms at the top of the size distribution, nor does it emerge from the size distribution of entrants. The paper reconciles these empirical results with a model of firm dynamics with endogenous informality and shows that calibrated values of entry barriers and productivity-dependent idiosyncratic distortions generate a "missing middle" that is consistent with its underlying drivers in the data.

Date: 2022-11-16
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