Informal housing, spatial structure, and city compactness

This paper develops a monocentric city model with a formal and an informal sector in the housing industry. While formal developers build houses renting land from landowners, informal developers use land for free. However, informal developers must incur defensive expenditures to avoid government intervention. In equilibrium, at any distance of the central business district (CBD), informal developers use land until the value of the marginal productivity of land equals the defensive expenditures per unit of land. The model shows the land allocated to produce short informal (tall formal) buildings increases (decreases) with distance to the CBD. Thus, the model introduces a new source of spatial variation of building height. The model also shows that a higher level of informal housing increases the spatial size of a city and reduces the height of its buildings.