5), then the 12 good categories of the COICOP 2-digit level classification (column 6), then the 47 categories of the COICOP 3-digit level (column 7) and finally the 117 categories at the COICOP 4-digit level (column 8). Preferences across goods explain part of the association: controlling for food goods alone explains 35% of the slopes, while controlling for the 12 broad 41% of the variation. for narrow goods categories explains Controlling goods categories only slightly reduces the slope further.<sup>20</sup> Finally, column 9 shows the average IEC slope with all controls included. The average IEC slope is 4.3 and remains statistically significant in all but three countries. Overall, observable characteristics explain 54% of the association between informal expenditure shares and household income. We these results for our two alternative as- reproduce signment rules and find similar results (see Tables A2 and A3).

# **3.2.2 Quality-Price Trade-off between the Formal and Informal Sectors**

The previous analysis shows that observable location and preferences across goods explain half of the IEC slopes on average, but they remain significantly different from zero in most countries after these controls. In six countries in our the ex- including sample penditure module asks households their main reason for choosing a place of purchase for each item; the possible reasons are access, price, quality, store attributes and other.<sup>21</sup> Table 3 reports the average frequencies for each reason. Column 1 shows that across all store access is chosen for 41% of that even at types, purchases, suggesting controlling the survey block might not capture fully the local nature of shopping preferences.<sup>22</sup> Columns 2 and 3 show the same frequencies separately for informal and formal stores. The key difference that emerges is that households visit informal stores for their prices and formal stores for their quality.<sup>23</sup> This result is robust to a set of controls and to the inclusion of household fixed effects.<sup>24</sup> Figure A9 shows that in each of the six countries, this taste for quality is more prevalent for richer households, as they are up to four times more likely to report quality as the reason for choosing any type of store.

> 20Figure A8 displays visually these results for each country by showing the residual IEC slopes when controlling for increasingly narrow goods categories.

> 21In all surveys, seven reasons are listed which we classify into five categories: access is defined as ”The retailer is closer or more convenient” and ”The good or service cannot be found elsewhere”; price as ”The good or services are cheaper”; quality as ”The goods or services are of better quality”; store attributes as ”The retailer offers credit” and ”The retailer is welcoming or is a friend”; and, other as ”Others reasons”. 22This could reflect the fact that many households in our sample cannot invest in costly durables, such as cars, which may give them access to a wider variety of stores (Lagakos, 2016).

> 23Access is slightly more frequently reported as a reason to visit an informal store, which could reflect a lack of store choices in poorer rural locations.

> 24Within a given household, formal store purchases appear motivated by higher quality while informal store purchases appear driven by lower prices.

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