Is Productivity Advantage of Cities Really Down To Shift, Dilation, and Truncation?

Firms in denser areas are more productive, owing to agglomeration and selection. To disentangle these channels, Combes et al. (2012, ECTA) assume that total factor productivity (TFP) distributions in denser and less dense areas are identical up to shift, dilation, and truncation. Using Spanish firm-level data and methods robust to noisy TFP estimates, we find that TFP distributions are indeed statistically identical up to these parameters, validating such decompositions. Furthermore, shifts and dilations alone are sufficient to capture distributional differences, at least in Spain. This suggests that policymakers should focus on agglomeration policies.