Some 62% of Africa’s urban population lives in slums (UN-Habitat, 2010) and there is often a hodgepodge of land use, with slum areas persisting next to modern developments near city centers. Inefficient land use and sub-optimal stocks of residential and infrastructure capital have costs for the functioning of the city as a whole. There are direct costs as, for example, data for Nairobi suggest that land near the city center that is currently occupied by slums foregoes around two-thirds of its value compared to neighboring formal developments (Henderson et al. 2016). There are wider costs of loss of connectivity between economic agents, imposing costs on firms and manifest in some of the longest commuting times in the world.

The third feature of African cities is the apparent paradox of relatively high nominal wages and prices in many cities, despite their low real income and lack of modern sector employment. This is a feature that, as we will see, can emerge as an outcome in the model. The evidence for it comes from several sources. Jones (2016) reports that firms in African cities pay wages (at official exchange rates) about 15% higher than in non-African cities, conditional on national real GDP pc. Labor costs are estimated at up to 50% higher. Corresponding to this, sales per worker are about 25% higher than in comparable non-African cities, but this is largely in the non-traded sectors and appears to simply reflect higher prices not physical productivity.<sup>5</sup> High nominal wages are matched by high prices of goods and services. Nakamura et al. (2016) use ICP data to study the cost of living of urban households across countries and find that it is some 20- 30% higher in African countries than in other countries at similar income levels.<sup>6</sup> Part of this is due to high rents and urban transport costs (respectively 55% and 42% higher than in comparable places elsewhere) although it extends to other commodities. Prices of food and other goods are also relatively high. Henderson and Nigmatulina (2016) show that, across developing country cities, high prices are negatively associated with a measure of connectivity between people in the city.

Our model captures these features, and is developed in a series of stages. Section 2 lays out the ingredients, characterizes equilibrium and undertakes comparative statics to establish the determinants of city specialization, as well as of city size, density and rent levels. While Section 2 maintains the assumption of constant returns to scale in tradable production, Section 3 moves to environments with increasing returns, establishing the possibility of multiple equilibria and the roles of history and expectations in shaping outcomes. Section 4 concludes and offers policy implications.

> 5 These findings on labor costs and price levels are consistent with earlier work by Gelb et al. (2013, 2015), although this work does not have an urban focus.

> 6 Nakamura et al. also report findings from the Economist Intelligence Unit’s Worldwide Cost of Living Survey.  While this is produced principally for expatriates its findings are consistent, indicating African cities are 30% more costly for households than cities in low- and middle-income countries elsewhere.

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