of footprint reduction versus housing affordability.

In Section 2 below, we briefly present relevant Cape Town stylized facts regarding job locations (polycentrism), the high level of income inequality that prevails in the city, and the different housing submarkets that coexist. Section 3 then details the theoretical model. Section 4 presents the data and calibration. Section 5 describes a benchmark simulation and the effects of the two sets of policies. Section 6 briefly concludes.

# **2. The Cape Town context**

Cape Town is a sprawling middle-income city of 4.2 million residents, with an ethnically diverse population (46% Black Africans, 40% “Coloured” (Mixed Descent), 13% Whites and 1% Indians/Asians). The city faces a population growth of 2.4% annually, fueled by in-migration from South African rural areas and other African countries. It has inherited high levels of poverty and acute income inequality (which is highly correlated with race) from past Apartheid policies: As a result, the Gini index for Cape Town is among the highest in the world, reaching .62 in 2017.

This high level of inequality is associated with a fragmented housing market, consisting of four main segments: (i) privately developed formal housing (which houses 52% of residents in 2016), (ii) State-subsidized formal housing (29%), (iii) informal structures in informal settlements (9%), and (iv) structures erected illegally in the backyards of formal housing, mainly State-subsidized housing (8%) (source: Statistics South Africa). Informal settlements first appeared in Cape Town with the rapid urbanization of Black Africans that was stimulated by the labor demands of the wartime economy in the late 1940s (Wilkinson, 2000). They re-appeared at scale during the 1970s as a result of inadequate affordable housing provision coupled with the relaxation of Apartheidera "influx control laws" (which sought to limit internal in-migration of rural Black Africans to cities). As in the rest of South Africa, housing in informal settlements in Cape Town is characterized by small one-story structures made of corrugated iron sheeting and packed at relatively high densities on peripheral, publicly-owned land originally reserved for future roads, social facilities or public housing. The same type of housing can be encountered as backyard structures although these backyard structures may also be made of brick and mortar. Backyarding was historically a non-transactional, kin-based arrangement first associated with Council housing rolled out for households of Mixed Descent in the 1950s and 1960s. Its proliferation as a housing market accelerated in earnest, alongside informal settlements, in the wake of large-scale state-driven housing programs from the 1980s onwards, such as the Reconstruction and Development Programme in 1994 (’RDP’) and, more recently, with the Breaking New Ground (’BNG’) program (Lemanski, 2009). Both programs aimed to allocate individual, free-standing dwellings by means of full capital subsidy to eligible households (Landman and Napier, 2010). These capital subsidies are effects (including e.g., removing workers from the labor force, reducing education and health outcomes, and more generally, a loss in efficiency from the misallocation of land), reducing the level of housing informality in a city can be a justified policy objective. Note, however, that completely eradicating informality may not necessarily be desirable in a second best setting wher formalization is very costly as moderate levels of slums may provide the poor access to urban economic opportunities in excess of the negative externalities they generate (see Cai et al., 2018, who derive this result by contrasting _laissez-faire_ and social planner equilibria in a spatial dynamic stochastic setting).

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