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Two main hypotheses are usually put forward to explain the productivity advantages of larger cities: agglomeration economies and firm selection. Combes et al. (2012) propose an empirical approach to disentangle these two effects and find no impact of selection on local productivity differences. We theoretically show that selection effects do emerge when heterogeneous trade costs and the different spatial scale at which agglomeration and selection may work are properly taken into account. Our empirical findings confirm that agglomeration effects play a major role. However, they also show a substantial increase in the importance of the selection effect. K E Y W O R D S agglomeration economies, firm selection, market size, openness to trade J E L C L A S S I F I C AT I O N : c52, r12, d241 the elasticity of productivity with respect to city population range between 0.02 and 0.10, and the evidence is confirmed for several countries and sectors. In an analysis on Italian manufacturing firms, Di Giacinto et al. (2014) detect local productivity advantages for both types of agglomerated areas they take into consideration: urban areas, which typically display a huge concentration of population and host a wide range of economic activities, and industrial districts, which exhibit a strong concentration of small firms producing roughly the same products. The authors also find that advantages are much larger for urban areas. 949 J Regional

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