Measuring the Full Costs of Agglomeration: Accounting for the Extra Expense of Working in Developing Country Cities

income per capita) than those of the advanced economies. However, they appear to be driven largely by higher costs of congestion and prices in urban agglomerations. The elasticity of TFPQ with density is in fact negative for all but Chile—the only country for which productivity gains rise faster than costs. With development, productivity gains rise, and marginal costs fall, suggesting that developing country cities are not functioning as expected in the advanced economies.

Measuring the Full Costs of Agglomeration: Accounting for the Extra Expense of Working in Developing Country Cities

The preceding exercises demonstrate how controlling for prices importantly changes the conclusions about agglomeration benefits generated from the canonical measures of wage and TFPR elasticities. These price measures partially reflect the direct costs of working in cities (such as higher housing costs or time lost in transport) or compensation for cities’ disamenities (such as pollution and more crime). These costs have received far less attention than agglomeration benefits in the literature, but the results of this volume are consistent with the few studies that have appeared. Combes, Duranton, and Gobillon (2019) find a cost elasticity slightly larger than the agglomeration elasticity even in cities in an advanced economy (France), suggesting that the net benefits from city size are close to being flat. Duranton (2016) obtains comparable results for cities in Colombia. The meta-analysis in Grover, Lall, and Timmis (2021) suggests that studies controlling for urban costs find the elasticity to be 4.2 percent lower than studies that do not. For example, if elasticity is measured using labor productivity and wages, then the net elasticity controlling for urban costs would be 0.1 percent for high-income countries, while the corresponding estimate would be 1 percent for non–high-income countries.

Breaking apart these costs, Duranton and Puga (2020) show that a typical elasticity of the price of housing at the center of a city with respect to city population in advanced economies such as France and the United States is about 0.1 and the typical elasticity with respect to land prices is about 0.3. With housing representing one-third of household expenditure in large cities, the cost of living in a city that is 10 percent denser is about 1 percent higher. These costs seem to rise in developing countries. This volume collected data from hundreds of cities around the world to construct estimates of urban disamenities with respect to pollution, congestion, and crime (see Grover, Lall, and Timmis 2021).14 Population density is estimated from the built-up area per person using the Global Human Settlement Urban Centre Database for 2015, the latest year for which the necessary data are available.

The analysis in this volume suggests that urban disamenities are higher in levels in developing countries (see figure 2.14). For the average city density in the data, in highincome countries 19 percent to 30 percent fewer hours are spent in traffic congestion, pollution is 16 percent to 28 percent lower, and the homicide rate is around four times lower. Relative to high-income countries, the agglomeration elasticity of disamenities