Abstract
Many cities in developing countries are characterized by a striking juxtaposition of formal and informal housing, where these sectors coexist in close proximity. This paper develops a model of urban land markets where both the formal and informal sectors are endogenously and mutually determined. More specifically, the informal market arises as a kind of residual effect of decisions made in the formal sector. The model posits a fixed number of rich and of poor households, all of whom are competing in the marketplace for a place to live. Rich households enact formal land use regulations in the form of minimum lot size requirements that directly reflect their preferences. The impacts of these regulations on the informal sector depend upon relative incomes and populations of poor and rich households, as well as on housing preferences. In order to assess these impacts empirically, the paper formulates a set of stylized case studies. The model results illustrate that the formal and informal sectors do not exist independently from one another, but are instead dual aspects of a single market phenomenon. In particular, an insufficient absorptive capacity of the formal sector results directly in informality.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
See, variously, UN-HABITAT (2003) The Challenge of Slums: Global Report on Human Settlements 2003. London: Earthscan, Part IV: ‘Summary of City Case Studies’, pp. 193–228; and Municipal Corporation of Greater Mumbai (2002) The Environmental Status Report of Mumbai: Executive Summary. http://archidev.org/IMG/pdf/esr-execsum-eng.pdf. Accessed August 22, 2013; and (for Nairobi) Sheehan (2005) Treating People and Communities as Assets. Global Urban Development Magazine 1(1). http://www.globalurban.org/Issue1PIMag05/Sheehan%20article.htm. Accessed 22 August 2013.
See chapter 2 of Heikkila (2000) The Economics of Planning, CUPR Press, New Brunswick, for a textbook treatment of this basic diagram.
For these and other examples from Latin America we are grateful to Martim Smolka of the Lincoln Institute of Land Policy and to his colleagues Isabel Brain, Cynthia Goytia, Camila Maleronka, and Catalina Molinatti. For insights into land use regulations in the Philippines we are grateful to Alethea Abuyuan-Monge and Tony La Vina.
Because of the LES specification, any income spent by poor households in the informal sector on other goods is futile because \(l_{0} =\gamma _{l}\) ensures that household utility is zero.
Although we do not attempt to do so within the confines of this model, it is interesting to consider the case where land is owned not by absentee landlords, but instead by the wealthy households who will then be pulled in two directions at once.
Note that, aggregate demand for land in the formal sector by households residing in the informal sector is uniformly zero, as shown in the corresponding row of Table 1. Of course, these poor households in the informal sector do occupy the minimum subsistence quantity of land, \(\gamma _{l}\), but Table 1 reports only on the formal sector land allocations.
The 2000 annual poverty threshold income for a five-member household in Metro Manila is 78,390 Philippine Pesos (Ballesteros 2004: 6). This is equivalent to 1,797 US Dollars based on the exchange rate as of November 29, 2011. “Low-income households [in India] are defined as households with monthly incomes of Rs 7,000 (about \({\$}\)165) or less” (Asian Development Bank 2000: 9). That is to say the annual household income for the low-income household is \({\$}\)1,980. We determine the income level for the poor households in reference to these data.
Recall that, in our model, minimum lot size restrictions were presumed to conform to the preferences of the wealthy class.
References
Arnott R (2008) Housing policy in developing countries: the importance of the informal economy. Commission on Growth and Development, Washington DC
Asian Development Bank (ADB) (2000) Housing Finance II Project in India. Asian Development Bank, Mandaluyong City
Ballesteros MM (2004) Rental housing for urban low-income households in the Philippines. Philippine Institute for Development Studies, Discussion Paper Series No. 2004-47. http://serp-p.pids.gov.ph/details.php?pid=3009¶m=housing+sector. Accessed 24 August 2013
Ballesteros MM (2010) Linking poverty and the environment: evidence from slums in Philippine Cities. Philippine Institute for Development Studies, Discussion Paper Series No. 2010-33
Brueckner JK (1996) Welfare gains from removing land-use distortions: an analysis of urban change in post-apartheid South Africa. J Reg Sci 36(1):91–109
Brueckner JK, Selod H (2009) A theory of urban squatting and land-tenure formalization in developing countries. Am Econ J Econ Policy 1(1):28–51
Buckley RM, Kalarickal J (eds) (2006) Thirty Years of World Bank Shelter Lending: what have we learned? World Bank, Washington DC
Cities Alliance (2004) Integrating the poor: urban upgrading and land tenure regularisation in the City of São Paulo. http://www.citiesalliance.org/integrating. Accessed 23 August 2013
Deaton A, Muellbauer J (1980) Economics and consumer behavior. Cambridge University Press, New York
Deininger K, Feder G (2009) Land registration, governance, and development: evidence and implications for policy. World Bank Res Obs 24(2):233–266
de Soto H (1989) The other path: the invisible revolution in the Third World. Harper & Row, New York
de Soto H (2000) The mystery of capital: why capitalism triumphs in the West and fails everywhere else. Basic Books, New York
Durand-Lasserve A, Selod H (2009) The formalization of urban land tenure in developing countries. In: Lall SV et al (eds) Urban Land Markets: improving land management for successful urbanization. Springer, New York, pp 101–132
Duranton G (2008) Viewpoint: from cities to productivity and growth in developing countries. Can J Econ 41(3):689–736
Feder G, Nishio A (1998) The benefits of land registration and titling: economic and social perspectives. Land Use Policy 15(1):25–43
Feler L, Henderson JV (2011) Exclusionary policies in urban development: under-servicing migrant Households in Brazilian cities. J Urban Econ 69(3):253–272
Fields GS (2007) Employment in low-income countries: beyond labor market segmentation? In: Paci P, Serneels P (eds) Employment and shared growth: rethinking the role of labor mobility for development. The World Bank, Washington DC, pp 23–36
Fischel WA (1985) The economics of zoning laws: a property rights approach to American land use controls. Johns Hopkins University Press, Baltimore
Fischel WA (1990) Do growth controls matter? A review of empirical evidence on the effectiveness and efficiency of local government land use regulation. Lincoln Institute of Land Policy, Cambridge
Friedman J, Jimenez E, Mayo SK (1988) The demand for tenure security in developing countries. J Dev Econ 29(2):185–198
Galiani S, Schargrodsky E (2010) Property rights for the poor: effects of land titling. J Public Econ 94(9–10):700–729
Glaeser EL, Ward BA (2009) The causes and consequences of land use regulation: evidence from Greater Boston. J Urban Econ 65(3):265–278
Goytia C, Lanfranchi G (2009) Informal neighborhoods in the Buenos Aires metropolitan region: understanding the effects of land regulation on the welfare of the poor. In: Lall SV et al (ed) Urban Land Markets: improving land management for successful urbanization. Springer, New York, pp 163–190
Gulyani S, Talukdar D (2009) Informal rental markets: the low-quality, high-price puzzle in Nairobi’s slums. In: Lall SV et al (ed) Urban Land Markets: improving land management for successful urbanization. Springer, New York, pp 191–223
Heikkila EJ (2000) The economics of planning. CUPR Press, New Brunswick
Henderson JV (2009) The effect of residential land market regulations on urban welfare. In: Lall SV et al (eds) Urban Land Markets: improving land management for successful urbanization. Springer, New York, pp 25–49
Ihlanfeldt KR (2007) The effect of land use regulation on housing and land prices. J Urban Econ 61(3): 420–435
Jimenez E (1984) Tenure security and urban squatting. Rev Econ Stat 66(4):556–567
Johnson SR, Hassan ZA, Green RD (1984) Demand systems estimation: methods and applications. Iowa State University Press, Ames
Lanjouw JO, Levy PI (2002) Untitled: a study of formal and informal property rights in urban ecuador. Econ J 112(482):986–1019
Lewis WA (1954) Economic development with unlimited supplies of labour. Manch School 22(2):139–191
Malpezzi S, Chun GH, Green RK (1998) New place-to-place Housing Price Indexes for U.S. metropolitan areas, and their determinants. Real Estate Econ 26(2):235–274
Municipal Corporation of Greater Mumbai (2002) The environmental status report of Mumbai: executive summary. http://archidev.org/IMG/pdf/esr-execsum-eng.pdf. Accessed 22 August 2013
Payne G, Durand-Lasserve A, Rakodi C (2009) Social and economic impacts of land titling programs in urban and Periurban areas: a short review of the literature. In: Lall SV et al (eds) Urban Land Markets: improving land management for successful urbanization. Springer, New York, pp 133–161
Philips L (1983) Applied consumption analysis. North-Holland Publishing Company, New York
Pollak RA, Wales TJ (1992) Demand system specification and estimation. Oxford University Press, New York
Quigley JM, Rosenthal LA (2005) The effects of land use regulation on the price of housing: what do we know? what can we learn? Cityscape 8(1):69–137
Sheehan MO (2005) Treating people and communities as assets. Global Urban Development Magazine 1(1). http://www.globalurban.org/Issue1PIMag05/Sheehan%20article.htm. Accessed 22 August 2013
UN-HABITAT (2003) The challenge of slums: global report on human settlements 2003. Earthscan Publications, London
Zabel J, Dalton M (2011) The impact of minimum lot size regulations on house prices in eastern Massachusetts. Reg Sci Urban Econ 41(6):571–583
Acknowledgments
We the authors are grateful to the editor and reviewers for their many constructive comments leading directly to improvements in this paper. Responsibility for any shortcomings of the paper that might remain rest entirely with us.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Heikkila, E.J., Lin, M.C.Y. An integrated model of formal and informal housing sectors. Ann Reg Sci 52, 121–140 (2014). https://doi.org/10.1007/s00168-013-0578-9
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00168-013-0578-9