Spatial Spill-overs and Households Involvement in the Non-Farm Sector: Evidence from Rural Rwanda

This paper studies the effects of external economies of scale on households’ involvement in the non-farm sector. The focus of the paper is on the type of knowledge spill-overs that occur at the level of individuals; these relate to learning processes and non-market interactions. Nationally representative data on 8,100 households surveyed in 2006 and 2009 are used and unobserved heterogeneity and spatial dependencies are modelled by employing a multi-level model and instruments in the form of clustered cantered means. The findings show that in addition to other household characteristics related to education, asset endowments and credit availability, measures of agglomeration economies are positively associated with smallholders’ degree of involvement in non-farm activities. The results indicate that there exist significant scale efficiencies associated with local markets and that an important part of the capacity to diversify lies outside households, residing instead in their locations.