Gray Zones: Slums and Urban Structure in Developing Countries

Slums are prevalent in many developing country cities and are a critical feature of their landscape. Slums are characterized by the lack of well defined property rights and by precarious public infrastructure, such as access to improved water and sanitation. However, they allow poor households to live in the city close to where they work and enjoy agglomeration externalities. We investigate how slums are formed and how different urban related policies affect the structure of a city. We build a dynamic spatial environment in which agents are heterogenous in their labor productivity and they endogenously choose where and the type of housing mode (formal or informal) they live. We fit the model such that key macro and micro level moments of the city of Sao Paulo in Brazil are matched. We then implement counterfactual exercises to assess the role of urban land use and transportation policies on the city landscape and welfare of their citizens. We show that some policies can have non-trivial effects. For instance, a fall in transportation costs rises the overall efficiency of the city, which attracts more households to the city. Immigration from rural households increases house prices and lead to a substantial rise in slums on the border of the city. We also show that given the land use in a city, slums can be persistent over time even when the city adopts urban policies to foster formal housing.