No.666 Agglomeration Economies in the Formal and Informal Sectors: A Bayesian Spatial Approach
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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