Building the City: Sunk Capital, Sequencing, and Institutional Frictions

53 Pages Posted: 18 Apr 2016

See all articles by J. Vernon Henderson

J. Vernon Henderson

London School of Economics & Political Science (LSE); National Bureau of Economic Research (NBER)

Tanner Regan

London School of Economics & Political Science (LSE)

Anthony J. Venables

University of Oxford; Centre for Economic Policy Research (CEPR)

Date Written: April 2016

Abstract

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.

Keywords: capital durability, city, housing investment, slum development, urban, urban form, urban growth, urban structure

JEL Classification: O14, O18, R1, R3

Suggested Citation

Henderson, J. Vernon and Regan, Tanner and Venables, Anthony J., Building the City: Sunk Capital, Sequencing, and Institutional Frictions (April 2016). CEPR Discussion Paper No. DP11211, Available at SSRN: https://ssrn.com/abstract=2766539

J. Vernon Henderson (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
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National Bureau of Economic Research (NBER)

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Tanner Regan

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Anthony J. Venables

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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