This dissertation consists of three chapters. Chapter 1 reviews the literature on informal sector. Informality is a widespread phenomenon in many developing countries. I start with summarizing the definition, measurement, and different views regarding informality. This is followed by reviewing the characteristics and various determinants of the informal sector. Then papers analyzing the effect of informality on the overall economy as well as those exploring the relationship between informality and international trade are reviewed. Lastly, I document work studying policies and programs related to informality. In Chapter 2, I study the effect of payroll tax reform on the economy. Due to the 2012 tax reform in Colombia, employers' social security contribution was reduced by 13.5 percentage points in payroll taxes. I use a theoretical framework with heterogeneous agents to analyze this change. The informal sector faces a capital constraint, whereas payroll tax is imposed on the formal sector. Using the model, I explain the effect of change in tax on informality and the overall economy. When there is a decrease in the payroll tax rate as it occurred in Colombia, the results from the model show that output, total factor productivity, and welfare increase, while informality decreases. However, there exists informal entrepreneurs who lose by the reform. In Chapter 3, I investigate whether the Great Trade Collapse during the 2008 Global Financial Crisis can be explained by a collapse in asset trade. The main hypothesis is that the borrowing countries were not able to borrow as much as before due to the crisis. I set up a semi-small open economy model with endogenous borrowing constraints, financial shocks, and productivity shocks. I examine the effect of financial shocks on asset holdings and trade balance. When there is a negative financial shock, my results show that a borrowing country borrows less than before and trade balance improves. This effect is smaller under a productivity shock as compared to a financial shock. The improvement in trade balance is mostly driven by decreased imports. Moreover, if firms have to finance working capital in advance of production, the effect of a financial shock on the economy is amplified.