and performing tax reforms can affect entrepreneurship, formalization rate, output, and productivity.

We first test the implications of the model using reduced form estimations techniques, based on a cross-section of micro-enterprises from the Business census and the National Survey on Employment and the Informal Sector. This allows us to test the theory by investigating empirically the importance of location and sector of activity on the extent of informality and firm performance. Our cross-sectional results show that firm profits increase with agglomeration and informal agricultural activities are the least profitable, whereas the least profitable formal activities are in the service sector. In addition, informal entrepreneurs operating in manufacturing, commerce and services are more likely to formalize than their counterpart in the agriculture sector. Second, we perform specification tests and provide structural estimates of the model using the Generalized Method of Moments and micro-data (firm-level and household-level) from Cameroon. We find that the return to capital and labor is not uniform across sectors and cities in Cameroon. Manufacturing industries are highly constrained in capital and the elasticity of capital is higher in Yaoundé and Douala, while labor elasticity is higher in Kribi, reflecting a low availability of workforce. One of the main advantages of using a structural econometric approach is that it allows one to generate counterfactual samples on the basis of a well-tested theoretical model that is consistent with the data. The counterfactual policy simulations that we perform based on the estimated model are then used to quantify the effects of several policy measures on informality and productivity. In particular, by identifying prominent sectors of activities (and/or strategic locations) and constraints faced by agents operating in these sectors (and/or locations), we provide a quantitative assessment of the impact that a targeted policy design such as improved infrastructure, access to finance or adjusted tax rates would have on aggregate productivity, job creation, formalization of informal firms, and government revenues. The results show that an increase in roads provision can have a substantial impact in terms of output, formalization of informal firms and productivity. A reduction in the current interest rate has no effect on business creation, but large and significant impact on the formalization of informal firms. The current tax rate could be adjusted to decentralized local optimal rates that would yield higher rates of formalization and business creation as well as higher amounts of government revenues. All these effects are heterogeneous across cities and/or sectors.

The remainder of the paper is structured as follows. Section 2 documents our data, and briefly presents the stylized facts about informality, location and business constraints. It also provides a first look at the geographic concentration of industries, the specialization of cities, and the formal/informal entrepreneurship in Cameroon. In Section 3, we develop a structural model of occupational choice in which individuals choose between wagework, informal entrepreneurship and formal entrepreneurship.

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