I investigate the role played by microentrepreneurship as an income of last resort. Using microenterprise surveys from developing countries, I document that, on average, 19% of microentrepreneurs start firms because they do not find jobs. Relative to the rest, these `necessity microentrepreneurs’ are more likely to come from unemployment, run smaller and less profitable firms, and earn larger income gains when transitioning to wage employment, consistent with a self-insurance motive. To evaluate the channel’s aggregate implications, I propose a two-sector model of occupational choice with labor market frictions, where risk-averse workers separated from wage work can resort to informal microentrepreneurship to avoid unemployment. I find that enforcing entry regulations among microentrepreneurs may reduce welfare even if it increases output. Despite significant challenges due to limited state capacity, introducing unemployment insurance increases welfare and is strongly progressive.

Low-income households in developing countries devote a larger share of spending to informal, cash-intensive goods. As a result, consumption taxes fall more heavily on the rich, whose spending is concentrated in the taxable formal sector, while inflation falls more heavily on the poor, who rely more on cash. To quantitatively evaluate the distributional consequences of both instruments, we develop a heterogeneous-agent model with a cash-intensive informal sector and a rich description of the goods market that yields the aforementioned non-homothetic consumption patterns. Calibrated to Peru – where informality accounts for around half of eco- nomic activity – the model shows that informal purchases provide significant savings through lower prices, particularly for poor households, who save up to 11% compared to purchasing the same bundle formally. In revenue-neutral reforms that trade off inflation against consumption taxes, we uncover sharp distributional conflict: households in the bottom decile prefer an 18% consumption tax rate with 4% inflation, whereas the top decile prefers a 13% consumption tax rate with 12% inflation. The disagreement grows with the size of the informal sector.