in our estimation, we aim to mitigate bias due to sorting effects. While, as indicated above, two of our countries - Brazil and Colombia - have already been considered by Chauvin et al. (2017) and Fally et al. (2010), and Duranton (2016) respectively - the remaining 14 countries have not, to our knowledge, been previously analyzed in the literature.

To ensure comparability of our estimates across countries, we use a harmonized dataset of nominal wages and characteristics of individual workers, and of the characteristics of the locations in which the workers live.<sup>7</sup> This data set is constructed from successive rounds of country specific household surveys extracted from the Socio-Economic Database for Latin America and the Caribbean (SEDLAC), and from a Geo-Spatial Database for Latin America and the Caribbean that was constructed for the World Bank’s Regional Flagship report Raising the Bar for Productive Cities in Latin America and the Caribbean (Ferreyra and Roberts, 2018). To further ensure the comparability of results both across the countries we study and with those available elsewhere in the literature for other countries, we apply a similar empirical specification to previous studies in the literature.

We find sizeable variations in sub-national levels of nominal wages - and, hence, productivity - within countries. Higher levels of productivity are typically observed in and around larger and more densely populated cities. Much of the variation in productivity across sub-national areas can be explained by observable compositional differences in the workforce, the skill-selective sorting of workers discussed previously. More productive areas tend to be populated by better educated workers.

Yet, there remains an important component of sub-national productivity whose variation cannot be explained by compositional differences in the workforce. This is consistent with the existence of positive externalities and spillovers between workers and/or firms and, therefore, the three theories of urban success, which we test empirically. Out of the three theories of urban success, evidence is found to support that the most important channel in the countries we analyze is human capital externalities, both in the pooled analysis and in the individual estimations by country.<sup>8</sup> Market access measures are found to be a statistically significant predictor of variations in sub-national productivity in the pooled analysis. However, this is only robust in 4 countries in the individual analysis.<sup>9</sup> Finally, agglomeration economies appear to be weak or non-existent across LAC countries in the pooled analysis. Five countries show positive and significant elasticities with respect to density, but all with very small magnitude. The effect is not significant in the pooled analysis. One potential explanation for the weakness of the agglomeration economies in our sample is suboptimal infrastructure that increases congestion under high densities, which in turn overwhelms

> 7Ideally, we would like to estimate agglomeration effects on the basis of where the workers are employed. However, our data only identify where they live.

> 8Our results on the importance of human capital could also, at least partly, be attributable to human capital complementarities in production. Empirically, it is difficult to distinguish between human capital externalities and complementarities. See Moretti (2004b) for a discussion on the interpretation of empirical estimates under externalities and complementarities and Ferreyra (2018) for analysis of the roles of human capital externalities and complementarities in driving high returns to human capital in LAC.

> 9Our market access measure does not include access to international markets.

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