Informality, commonly observed practice in Latin America, has been a controversial issue among scholars and policy makers. Recently informality draws the attention of economists, for whom its low productivity is problematized. A very sophisticated economic theory of informality was written by Santiago Levy, father of Conditional Cash Transfer program. According to the Mexican economist, combination of extended public assistance and inefficient social security system leads to the increase of informal employment, so, through the introduction of basic insurance scheme that covers all the workers, informality will shrink and the Mexican economy grow more. In this research, after reviewing the recent literature on informality, a political economic theory of informality is proposed to explain why institutional reforms consistent with the economic theory have not been realized or do not function as expected. Then, results of a case study of informal politics in the Cuauhtémoc Delegation, Mexico City, are presented. The relationship observed between the vote-seeking leftist parties (PRD and MORENA) and support-seeking street vendors and occupants of irregular settlements, mediated by Urban Popular Movement organizations, will be analyzed, clarifying the advantages and limits of the political mechanisms which reproduce informal economic activities.