Urbanization and Property Rights

Since the industrial revolution, the
economic development of Western Europe and North America was
characterized by continuous urbanization accompanied by a
gradual phasing-in of urban land property rights over time.
Today, however, the evidence in many fast urbanizing
low-income countries points towards a different trend of
“urbanization without formalization”, with potentially
adverse effects on long-term economic growth. This paper
aims to understand the causes and the consequences of this
phenomenon, and whether informal city growth could be a
transitory or a persistent feature of developing economies.
A dynamic stochastic equilibrium model of a representative
city is developed, which explicitly accounts for the joint
dynamics of land property rights and urbanization. The
calibrated baseline model describes a city that first grows
informally, with the growth of individual incomes leading to
a phased-in purchase of property rights in subsequent
periods. The model demonstrates that land tenure informality
does not necessarily vanish in the long term, and the social
optimum does not necessarily imply a fully formal city,
neither in the transition, nor in the long run. The welfare
effects of policies, such as reducing the cost of land
tenure formalization, or protecting informal dwellers
against evictions are subsequently investigated, throughout
the short-term transition and in the long-term stationary state.