The Messy Reality of Agglomeration Economies in Urban Informality: Evidence from Nairobi's Handicraft Industry

This paper investigates intermediate input effects and labor pooling in the context of urban informality, examining the handicraft industry of Nairobi, Kenya. The paper tests if conditions found in informality interfere with transition pathways in production clusters. 102 semi-structured interviews were conducted with industry participants, including 69 production firms. Findings confirm the existence of important agglomeration economies, but those benefits are curtailed due to constraints of informality on firms, especially location constraints in urban space. At the same time, informality also introduces particular diseconomies of agglomeration that undermine the value of proximity of firms to each other, particularly within clusters.