Proximity without Productivity : Agglomeration Effects with Plant-Level Output and Price Data

Recent literature suggests that the positive impact of population density on wages, thecanonical measure of agglomeration effects, is multiples higher in developing countries than in advanced economies.This poses an urban productivity puzzle because on-the-ground observations do not suggest that cities indeveloping countries function especially well or are conducive to enhanced productivity. This paper usesmanufacturing censuses from four countries at differing levels of income that allow separating plant output quantityfrom prices. It shows that higher wage elasticities with respect to density are due to higher marginal costs, andagglomeration elasticities of efficiency, physical total factor productivity, are in fact far lower in developingcountries. Further, congestion costs decrease with country income. Both are consistent with often low rates ofstructural transformation that make cities in developing countries so-called “sterile agglomerations,” which arepopulous but not efficient.