Abstract
We analyze the joint dynamics of land property rights and urbanization, a key yet underexplored relation that underpins the process of economic development. Using a dynamic stochastic model of urbanization with endogenous demand for property rights over land use, we demonstrate that the costly provision of those rights may result in both residential informality that can persist over time and suboptimal urbanization whereby cities are too small and insufficiently productive. In developing countries, because land administrations in charge of issuing titles are difficult to reform, achieving the second best may require acceptance of some level of informality in spite of the negative externalities stemming from informal land tenure and informal settlements. This may not be easily implemented as urban elites may favor overall welfare-reducing policies that over-evict informal dwellers.
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