This study examines the impact of a weather shock, specifically extreme rainfall days, on the welfare of the households in the formal and informal sectors.

We examine the impact of a weather shock, specifically extreme rainfall days, on the welfare of the households in the formal and informal sectors. We combine the theoretical framework of household production model in the presence of weather shocks with the dual economy model where sector choice is endogenous. We model the informality or formality of the households as endogenous regimes depending on the net benefits they are likely to get from being in a specific sector. We then estimate a simultaneous equation model with endogenous switching to account for the heterogeneity in the decision to be in the informal or formal sector. This allows us to assess the impact of extreme rainfall days on income and expenditure. We take the case of the Philippines by utilizing household data in 2006 to 2015.