Agglomeration Economies in the Formal and Informal Sectors: A Bayesian Spatial Approach

Discussion Papers

No.666

by Kiyoyasu TANAKA and Yoshihiro HASHIGUCHI

May 2017

ABSTRACT

This paper examines whether localized clusters of similar industries produce agglomeration economies in the formal and informal sectors. We develop a Bayesian method to estimate a spatial autoregressive model with an endogenous independent variable. We use establishment-level census data that cover both formal registered and informal unregistered establishments in Cambodia. We find that the density of local employment has a significantly positive effect on productivity in the informal sector, but little effect in the formal sector. For manufacturing, a doubling of employment density increases productivity in the informal sector by 9% through local linkages and by 17% through spatial multiplier linkages, leading to a 26% increase in total. A spatial network magnifies the local impact of agglomeration economies in the informal sector.

Keywords: Agglomeration economies, Informal sector, Cambodia, Bayes
JEL classification: C11, C21, C26, H26, O17, R12

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