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

Abstract This paper uses a novel firm-level dataset andfinds a "missingmiddle" in the employmentbased firm size distribution in four sub-Saharan African countries. This "missing middle" hinges on the inclusion of informal producers, 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. We reconcile these empirical results with a model of firm dynamics with endogenous informality, and show 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.