Publication: Measuring Risk on Investment in Informal (Illegal) Housing: Theory and Evidence from Pune, India
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Date
2008
ISSN
01660462
Published
2008
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In this paper, we analyze a household's decision to invest in informal (illegal) housing in developing countries. Using a simple model of housing supply, we show that the difference in the rates of return on housing investment in the formal and informal sectors reflects the additional risk associated with the latter. Using household survey data from Pune (a large city in India), we estimate this risk premium in the city to be approximately 22%, or 150 basis points. We use our approach to estimate the informal risk premium for cities in other countries based on results from previous studies.
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Publication Measuring the Risk on Housing Investment in the Informal Sector: Theory and Evidence from Pune, India(World Bank, Washington, D.C., 2004-10-01)The authors 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. 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