Building the City: Urban Transition and Institutional Frictions

March 7 2017

This paper models a growing city, and focuses on investment decisions and consequent patterns of land use and urban density. We distinguish between formal and informal sector construction. The former can be built tall (at a cost), but structures once built are durable and cannot be modified. Investments are based on expectations about future growth of the city. In contrast, informal structures are malleable and do not involve sunk costs. As the city grows areas will initially be developed informally, and then formally; formal areas are redeveloped periodically. This process can be hindered by land right issues which raise the costs of converting informal to formal sector development. The size and shape of the city are sensitive to the expected returns to durable investments and to the costs of converting informal to formal sector usage. We take the model to data on the built environment for Nairobi, to study urban growth and change between 2004 and 2015 in a context where population is growing at about 4% a year. We study the evolution of building footprints and heights, development at the fringe, infilling, and redevelopment of the formal sector.

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Tony Venables is Professor of Economics at the University of Oxford where he also directs the Centre for the Analysis of Resource Rich Economies. He has published extensively in the areas of international trade and spatial economics, including work on trade and imperfect competition, economic integration, multinational firms, and economic geography.

Vernon Henderson joined the LSE in September 2013 as School Professor of Economic Geography, having previously been Eastman Professor of Political Economy at Brown University, USA.

Tanner Regan is a PhD student at the department of Economic Geography at LSE.