Together, the results suggest an ambiguous impact of controlling for human capital, but in neither case do we find that physical productivity is positive.

# _Sensitivity to sample periods_

The patterns observed in our base results are also not an artifact of disruptive sample periods. In Colombia and Indonesia, we drop the years when the country was going through a crisis (2000-01 in Colombia and 2008-09 in Indonesia), while in Ethiopia, we drop the year 2005 when the census data collection was rather idiosyncratic. Table 2, panel e shows that in all cases, these estimates are quite close to our original sample period.

# _Sensitivity to quality in price indices_

As noted earlier, higher product prices in cities may capture higher quality products rather than costs and hence deflating revenues may lead effectively to downward bias in the TFPQ estimates. We explore the possible impact of this using the four different price indices constructed for Colombia by Eslava and Haltiwanger (2021) that account for product quality: the constant basket, Sato-Vartia, Feenstra, and CES Unified Price Index (CUPI).<sup>16</sup> Table 3 shows that the elasticities of the various adjusted indices are now higher than the .006 in the OLS estimates, ranging from .013 to .021, and are now uniformly significant suggesting, counterintuitively, that quality is actually lower as urbanization increases, perhaps reflecting that producing for the mass market leads to a lower average level of quality.<sup>17</sup> Correspondingly, the Foster et al. (2008) TFPQ estimates now move from insignificant -.004 to a range of -.018 to .021 with all but the constant basket coefficients entering significantly. The negative impact of agglomeration on productivity seems exacerbated in the Colombia case.

# **V. Conclusions**

This paper offers a resolution to what it calls the urban productivity puzzle surrounding the net benefits of agglomeration in developing countries: despite recent estimates of the elasticity of wages with respect to population density which suggest that agglomeration forces are multiples higher than in advanced countries, this seems at odds with the fact that developing country cities are often crowded, congested, polluted and are home to few sophisticated plants and skilled workers that would benefit from being together. They would seem to offer _proximity without productivity_ . To unpack this puzzle, the paper develops a schematic of what is, in fact, being measured, by existing studies using wages, and then provides the first estimates of the elasticities of physical efficiency and productivity. While our firm level data-based estimates of wage elasticities are below

> 16 CUPI in Redding and Weinstein (2020) adjusts prices to account for the evolution in the distribution of within-plant product appeal, emanating both from changes in appeal for continuing products and the entry/exit of products. The quality adjusted prices in the Feenstra (2004) and Sato-Vartia approach also considers the changing baskets of goods that reflects changing demand for quality, keeping the assumption of a constant firm appeal distribution for continuing products.

> 17 Our thanks to Marcela Eslava for suggesting this interpretation.

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