We first confirm the literature’s findings of high elasticities of wages and revenue total factor productivity (TFPR) in the poorer countries: Our wage elasticity estimates using plant-level data for Ethiopia of .052, and for Indonesia of .057 are not as high as those for China, India and Africa estimated using the labor surveys mentioned above, but they are three times our estimate for the richest country in our sample, Chile (.017) which is close to the estimates for more advanced countries. However, we then show that these measured benefits largely disappear once the concomitant rise in prices is accounted for – efficiency gains measured as the elasticity of physical total factor productivity (TFPQ) with respect to density show negative point estimates for the three lower income countries and significantly so in some specifications for Ethiopia and Colombia. Rather, we find that the elasticity of marginal cost is strongly positive for these countries, suggesting that the costs of operating in developing country cities increase sharply with population, and this pushes up prices and hence wages. Our estimates suggest that the TFPQ elasticity, in fact, increases with development, while the marginal cost elasticity decreases. The net benefit to firms of operating in a city rises steeply with development, with the elasticity of gains in productivity exceeding that of increasing costs likely occurring only at middle income.

These findings raise the question about why firms and workers would move to the city in the first place if they are not getting productivity enhancing benefits. It first bears noticing that the equation of urbanization with industrialization and even increased productivity is historically a recent one. Bairoch (1988) reminds that urbanization began with the emergence of surplus arising from sedentary agriculture and cities served as a provider of services and distribution of rents long before the arrival of industrialization. In his most negative account, he sees Rome, the largest city in the ancient world, as an exactor of tribute, a “parasitic” city that had little in the way of industry, and sees many developing country cities as “Romes without empires”(p. 466 ).<sup>2</sup> Gollin et al. (2016) echo and update this mechanism by arguing that developing country agglomerations often are not accompanied by structural transformation into industries that would benefit from spillovers and deeper factor markets, but rather are distribution points for natural resource wealth—they are consumption not production cities. International aid, whose first stop is generally the capital, could also serve to support consumption. Ethiopia, for instance, receives roughly 4 percent of GDP in foreign aid, which is large when we consider that Chile’s entire mining sector constitutes 9 percent of GDP. In a similar vein, migrants may be seeking out (subsidized) health and education services and amenities unavailable in the rural areas as much as more productive jobs. Ades and Glaeser (1995) also stress political reasons for urbanization, particularly in primate cities, because spatial proximity to power increases political influence or rents. They find that dictatorships have central cities 50 percent larger than democracies. In these rent-distributing or consumption cities, utility derived from these sources, not firm productivity, needs to exceed the disutility of congestion. In a more traditional take, Krugman and Livas (1996) and others argue that high internal transport costs may lead

> 2 Apologies to Krugman and Livas (1996).

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