Publication: Measuring the Risk on Housing Investment in the Informal Sector: Theory and Evidence from Pune, India
Date
2004-10-01
ISSN
Published
2004-10-01
Author(s)
Kapoor, Mudit
le Blanc, David
Abstract
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. 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: 1) Rates of return are significantly
higher in the informal sector, as predicted by the model. 2)
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. 3) 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.
Link to Data Set
Citation
“Kapoor, Mudit; le Blanc, David. 2004. Measuring the Risk on Housing Investment in the Informal Sector: Theory and Evidence from Pune, India. Policy Research Working Paper;No.3433. © World Bank, Washington, D.C.. http://hdl.handle.net/10986/14235 License: CC BY 3.0 IGO.”
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