To account for the uneven distribution of economic activity in space, I propose a theory of the location choices of heterogeneous firms in a variety of sectors across cities. In equilibrium, the distribution of city sizes and the sorting patterns of firms are uniquely determined and affect aggregate TFP and welfare. I estimate the model using French firm-level data and find that nearly half of the productivity advantage of large cities is due to firm sorting, the rest coming from agglomeration economies. I quantify the general equilibrium effects of place-based policies: policies that subsidize smaller cities have negative aggregate effects. (JEL D22, D24, R11, R32)

Tourism is a fast-growing services sector in developing countries. This paper combines a rich collection of Mexican microdata with a quantitative spatial equilibrium model and a new empirical strategy to study the long-term economic consequences of tourism both locally and in the aggregate. We find that tourism causes large and significant local economic gains relative to less touristic regions that are in part driven by significant positive spillovers on manufacturing. In the aggregate, however, these local spillovers are largely offset by reductions in agglomeration economies among less touristic regions, so that the national gains from trade in tourism are mainly driven by a classical market integration effect. (JEL L60, L83, O14, O18, R11, Z31, Z32)A conventional view in the literature on economic growth and development is that the production of traded goods is subject to dynamic productivity improvements, whereas the services sector is perceived to be more stagnant. 1 In line with this view, the locus of agglomeration economies is generally assumed to be the manufacturing sector, rather than services. This asymmetry has important implications for the growth strategies of developing countries, and whether they should prioritize the development of traded goods producing sectors. At the same time, there is relatively little empirical evidence on the economic consequences of the development of the services sector in developing countries, and whether the reallocation of factors of production into services can give rise to adverse long-term effects both locally and in the aggregate. 2 This paper sets out to study the economic consequences of tourism, a fast-growing services sector in developing countries. Tourism involves the export of otherwise non-traded local services by temporarily moving consumers across space, rather than 1 This view is in the tradition of Baumol (1967). See Herrendorf, Rogerson, and Valentinyi (2014) for a review of the recent literature, and McMillan and Rodrik (2011) for an analysis in the context of developing countries. 2 See, for example, Copeland (1991) for an early theoretical discussion of tourism as a potential "Dutch disease."

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, and seminar and conference participants for insightful comments, and Joe Abadi, Dima Mukhin, Mark Razhev and Max Vogler for excellent research assistance, and Davin Chor for sharing his data. Cecile Gaubert gratefully acknowledges financial support from the Clausen Center at UC Berkeley. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

We study optimal spatial policies in a quantitative trade and geography framework with spillovers and spatial sorting of heterogeneous workers. We characterize the spatial transfers that must hold in efficient allocations, as well as labor subsidies that can implement them. There exists scope for welfare-enhancing spatial policies even when spillovers are common across locations. Using data on U.S. cities and existing estimates of the spillover elasticities, we find that the U.S. economy would benefit from a reallocation of workers to currently low-wage cities. The optimal allocation features a greater share of high-skill workers in smaller cities relative to the observed allocation. Inefficient sorting may lead to substantial welfare costs.