Agglomeration economies in the presence of an informal sector: the Colombian case

Abstract

This paper analyzes the relationship between agglomeration economies and productivity in the context of a developing country in presence of an informal sector. Using data from Colombia, we examine whether the informal sector achieves benefits from agglomeration economies as well as whether there are differences between the formal and informal sectors in terms of agglomeration returns. We find that agglomeration economies have a significantly positive effect on productivity in the informal sector: informal workers in denser areas will earn approximately 11% more than those in less dense areas.