Agglomeration and Informality: Evidence from Peruvian Firms

Abstract

This paper contributes to the emerging literature investigating agglomeration externalities in developing countries. It is the first paper to estimate how agglomeration externality generation and reception varies for formal and informal firms by source. Using establishment level data, we find evidence of both significant agglomeration economies and diseconomies associated with the interaction of formal and informal firms. In spite of regulatory restrictions for formal and informal linkages, formal establishments benefit from an increase number of informal suppliers but not generally from an increase in formal supplier density. On the other hand, the number of workers in informal establishments demanding similar skills causes a negative effect on productivity. For establishments in some industries, increasing the number of formal and informal establishments in the same industry has a negative effect on productivity.