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Abstract:
Kapoor and le Blanc provide an economic framework to analyze investment in informal housing in developing countries. They consider a simple model of investment in the housing market where investors can choose between two sectors - the formal sector, where physical investment faces no risk of destruction, and the informal sector, where investment in each period is subjected to an exogenous risk of destruction. Construction costs differ between the two sectors. All households are renters. Renters shop for dwelling attributes and do not care about the sector (formal or informal) itself. The model implies that returns on investment, measured by the rent-to-value ration, will be higher in the informal sector. The authors use a survey conducted by the World Bank in Pune, India in 2002. The sample comprises 2,850 households. This survey had the peculiarity of asking the households, regardless of tenure status, questions about the market rent and value of their dwelling. Thus they can calculate individual rates of return for each unit without facing the typical selection bias problems. Comparing the distributions of returns in the informal and formal sectors, the authors obtain the following results:

- Rates of return are significantly higher in the informal sector, as predicted by the model.
- These figures imply a perceived risk on housing investment in the informal sector equivalent to an annual destruction rate ranging between 1 and 2 percent.
- The two distributions of rates of return present highly idiosyncratic components and are not well explained by variables proxying either the strength of informal property rights or lower perceived risks of eviction.

This paper - a joint product of the Infrastructure and Environment Team, Development Research Group, and the Urban Unit, Transport and Urban Development Department - is part of a larger effort in the Bank to better understand the dynamics of informal housing around the world.

Abstract:
Informal settlements are an integral part of the urban landscape in developing countries. These settlements are widely distributed within cities, including central business centers and peripheral areas with environment hazards. In most cases, residents of these settlements do not have access to basic public services and amenities. In this paper, the authors examine the impact of interventions, such as upgrading basic services and resettlement policies, on the welfare of residents of these informal settlements, who are typically the urban poor. To examine these interventions, they estimate models of residential location choice and allow households to be sensitive to commuting costs to work, demand for public services, and preferences for community composition. The authors' empirical analysis is based on recently collected survey data from Pune, India, and shows that poor households prefer to live close to work and in communities that consist of people sharing common socio-demographic characteristics. From the perspective of households living in informal settlements, upgrading settlements in the original place is welfare enhancing. If a household must be relocated, it greatly prefers to be moved to a community that resembles its current community.

This paper - a product of Infrastructure and Environment, Development Research Group - is part of a larger effort in the group to understand the impact of spatial policy interventions on welfare and livelihoods of the urban poor. The study and data collection have been co-funded by the Research Support Budget under the research project "Urbanization and Quality of Life" and by the U.K. DFID's Urban Knowledge Generation and Toolkits program.

Abstract:
Globalization has brought a sharp increase in the developed world’s labor supply. Labor in developing countries – countries with vast pools of underemployed people – can now more easily augment labor in the developed world, without having to relocate, in ways not thought possible only a few decades ago. We argue that the large increase in the developed world’s labor supply, triggered by geo-political events and technological innovations, is the major underlying cause of the global macro economic imbalances that led to the great recession. The inability of existing institutions in the US and the rest of the world to cope with this shock set the stage for the great recession: The inability of emerging economies to absorb savings through domestic investment and consumption due to inadequate national financial markets and difficulties in enforcing financial contracts; the currency controls motivated by immediate national objectives; and the inability of the US economy to adjust to the perverse incentives caused by huge money inflows leading to a breakdown of checks and balances at various financial institutions. The financial crisis in the US was but the first acute symptom that had to be treated. A sustainable recovery will only occur when the natural flow of capital from developed to developing nations is restored.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
In this paper we show that parking behavior of United Nations diplomats in New York City is strongly and consistently explained by the government effectiveness index of their respective countries. Government effectiveness index measures the quality of civil services, quality and quantity of public infrastructure as well as organizational structure of public offices. We compare our results with an earlier work which claims cultural norms of corruption to be a significant determinant of corruption. Our results show that controlling for the quality of government institutions, as defined by government effectiveness, reverses the coefficient on country corruption index and makes them statistically insignificant in all of the model specifications. Moreover, quite remarkably, we also find that the coefficient on the government effectiveness index is positive and statistically significant. Our results have important implications for anticorruption reforms which are advocated by multilaterals and foreign aid donors. If corruption is primarily controlled through government effectiveness, then interventions that focus on social norms or culture will be misplaced and unlikely to succeed.

Abstract:
This paper estimates the change in consumption caused by a higher real interest rate. We exploit the change in Indian banking legislation which encourages all banks to offer a higher interest rate on deposits to citizens above sixty years. We use detailed monthly consumption data from the Indian National Sample Survey to calculate regression discontinuity estimates, based on age cut-offs. We find that an increase of 50 basis points in the interest rate on deposits leads to an immediate decline of consumption expenditure by 12 percent. A study of disaggregated monthly consumption expenditure reveals that the decline is primarily in non-food, non-essential items. We calculate similar estimates for data prior to the banking legislation and find no significant difference in the monthly consumption expenditure. These results are useful in understanding the permanent income hypothesis within the context of an ageing world population.

interest rate, consumption expenditure, permanent income hypothesis, life cycle hypothesis