IDEAS home Printed from
   My bibliography  Save this paper

Informality and agglomeration economies: in search of the missing links


  • Ana Isabel Moreno Monroy


  • Michiel Gerritse



The informal sector absorbs on average 50% of employment in developing countries. However, it has not been considered in New Economic Geography (NEG) models that try to explain urbanization and agglomeration in developing countries. In a first attempt to bridge this gap, we develop a NEG model that incorporates the informal sector. Empirical evidence shows that the informal sector is mainly composed of relatively small firms that are unskilled labor intensive, face capital restrictions and that, given scale limitations, do not trade interregionally or internationally. Thus, besides an increasing returns to scale manufacturing sector, our model allows for an informal services sector with constant returns to scale and high transport cost. We investigate competitive as well as complementary roles for the informal sector and the manufacturing sector. To do so, we model competition on the demand side by allowing substitution between manufacturing and informal sector goods and complementary linkages on the production side, in the form of input requirements in manufacturing from the informal sector. Labor is mobile between industries and locations. The model predicts where informal employment flourishes. An informal sector arises at every location, but depending on manufacturing transport cost and preferences, the industrial or the rural location hosts the larger share of informal production. Vice versa, the size and characteristics of the informal sector have an effect on the long run outcome of the model. Not only does the informal sector influence the model's centripetal forces, but informal supply shocks (and regulation) may also determine the selection of one of multiple long run equilibria. Thus, an expanding informal sector can have both structural and long-run consequences for economic activity. In terms of policy, the paper shows that recommendations regarding rural-urban migration in developing countries are sensitive to agglomeration effects.

Suggested Citation

  • Ana Isabel Moreno Monroy & Michiel Gerritse, 2011. "Informality and agglomeration economies: in search of the missing links," ERSA conference papers ersa10p661, European Regional Science Association.
  • Handle: RePEc:wiw:wiwrsa:ersa10p661

    Download full text from publisher

    File URL:
    Download Restriction: no

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wiw:wiwrsa:ersa10p661. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Gunther Maier). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.