Abstract
This paper studies slum growth in Brazilian cities by estimating a spatial equilibrium model with two types of households and two types of housing. I explain the positive correlation observed between slum growth and economic growth in cities with three IV-estimated structural elasticities. The number of low-income households in a city increases with wages with an elasticity of 1.7. Housing rents increase with housing demand with elasticities of 0.37 for non-slum housing and 0.07 for slum housing. Economic growth in cities thus causes slum growth because it attracts large number of low-income households who face higher rent growth for non-slum than slum housing. I further show that as economic growth improves households’ incomes nationwide, an income effect reduces the national slum share. Finally, I find that two policy-relevant counterfactuals significantly increase aggregate income by relocating households into high-wage cities: 1) slum upgrading in high-wage cities 2) reducing the elasticity of non-slum housing rents to housing demand shocks.
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