informal firms, conditional on sector and geography, exhibit linking patterns similar to those of the smallest quartile of formal firms in the administrative data. This assumption addresses concerns that informal firms might have different linking patterns compared to larger formal firms operating in the same sector and location (e.g. due to internal economies of scale (Grant and Startz, 2022)).<sup>6</sup> Nevertheless, informal firms might encounter additional obstacles specific to informality.<sup>7</sup> To account for this, we implement additional sensitivity checks that account for alternative scenarios with lower linking probabilities between the formal and informal sector.

We use the revised network to answer the question of interest: How do spatial patterns of trade change when informal firms are accounted for? First, we find that sectors and regions with the highest levels of informality have more outlinks in the revised network relative to the baseline network. The spatial inequality in outlinks declines by 7% and the prominence of urban hubs like Nairobi and Mombasa decreases by 5 percentage points. We show that while this decrease in inequality of outlinks is driven by an increase in both inter-county and intra-county trade, intracounty trade rises by a larger margin. Moreover, we find that once informal firms are accounted for, the number of trade relationships between counties is more sensitive to the strength of social ties between them, measured using both online friendship networks and migration inflows.

Next, we simulate the pass-through of domestic and import shocks using both the baseline network estimated from the structural model and the revised network that incorporates informal firms. We find that ignoring informality leads us to underestimate the average impact of domestic shocks and overestimate the average impact of import shocks. In particular, when using the revised network, we find that domestic output shocks have a more pronounced negative effect on sector-regions with higher levels of informality, compared to results based on formal sector data alone. Our results suggest that a 1 percentage point decrease in the formal sector share corresponds with an underestimation of the reduction in output by 5 percentage points. By contrast, for import shocks, the bias goes in the opposite direction. The economy appears less exposed to import shocks once the informal sector is taken into account. This discrepancy arises because import shocks primarily affect larger formal firms, which carry less weight in the overall firm network once informality is incorporated.

Finally, we consider the sensitivity of our results with respect to alternative assumptions about the linking patterns of informal firms. We conduct bounding exercises where we further restrict the degree of integration of informal firms with the formal sector relative to small formal firms. Drawing on survey evidence and the existing literature (B ̈ohme and Thiele, 2014; Gadenne

> 6We provide evidence showing that the linking patterns of small formal firms are similar to what we would expect from informal firms – they link more locally and buy more from intermediaries relative to their larger peers.

> 7This can include wedges introduced by the VAT system itself (De Paula and Scheinkman, 2010; Gadenne et al., 2022).

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